GENERAL PRINCIPLES

DEFINTION AND CONCEPT OF TAXATION

Q: Define taxation.

A: It is an inherent power by which the sovereign:

1. through its law-making body
2. raises income to defray the necessary
expenses of government
3. by apportioning the cost among those
who, in some measure are privileged to
enjoy its benefits and, therefore, must
bear its burdens. (51 Am.Jur. 34)

Note: Simply stated, the power of taxation is the

power to impose burdens on subject and objects
within its jurisdiction.

NATURE OF TAXATION

Q: What is the nature of the power to tax?

A: The nature of the power to tax is two-fold:

1. inherent and
2. legislative.

Inherent Attribute of Sovereignty

Q: Why is the power of taxation considered

inherent in nature?

A: It is inherent in character because its exercise

is guaranteed by the mere existence of the state.
It could be exercised even in the absence of a
constitutional grant. The power to tax proceeds
upon the theory that the existence of a
government is a necessity and this power is an
essential and inherent attribute of sovereignty,
belonging as a matter of right to every
independent state or government (Pepsi-Cola
Bottling Co. of the Philippines V. Municipality of
Tanauan, Leyte, G.R. No. L-31156, February 27,
1976).

No sovereign state can continue to exist without

the means to pay its expenses; and that for those
means, it has the right to compel all citizens and
property within its limits to contribute, hence, the
emergence of the power to tax. (51 Am. Jur. 42)

The moment a state exists, the power to tax

automatically exists.

Basis: The Life-blood Doctrine.

Without taxes, the government would be
paralyzed for lack of motive power to activate
and operate it. Hence, despite the natural
reluctance to surrender part of one s earned
income to the taxing authorities, every person
who is able must contribute his share in the
running of the government. (CIR v. Algue, G.R.
No. L-28896, February 17, 1988)

Manifestations:
1. Imposition even in the absence of constitutional
grant
2. State s right to select objects and subjects of
taxation
3. No injunction to enjoin collection of taxes.
4. Taxes could not be the subject of compensation
and set-off.
5. A valid tax may result in destruction of property.

Q: May a legislative body enact laws to raise

revenues in the absence of constitutional
provisions granting said body the power of tax?

Explain.

A: Yes. It must be noted that Constitutional

provision relating to the power of taxation do not
operate as grants of the power of taxation to the
government, but instead merely constitute a
limitation upon a power which would otherwise
be practically without limit. (2005 Bar Question)

Q: Distinguish National Government from Local

Government Unit as regards the exercise of
power of taxation.

A:
1. National Government
inherent
2. Local Government Unit not inherent
since it is merely an agency instituted
by the State for the purpose of carrying
out in detail the objects of the
government; can only impose taxes
when there is:
a. Constitutionally mandated
grant
b. Legislative grant, derived from
the 1987 Constitution, Section
5, Article X.

Legislative in Character

Q: Why is the power of taxation legislative in

nature?

A: It is legislative in nature since it involves

promulgation of laws. It is the Legislature which
determines the coverage, object, nature, extent
and situs of the tax to be imposed.

Q: May the power of taxation be delegated?

A:
GR: No, since it is essentially a legislative
function.

This is based upon the principle that taxes are a

grant of the people who are taxed, and the grant
must be made by the immediate representatives
of the people. And where the people have laid the
power, there it must be exercised. (Cooley)

XPNs:
1. To local governments in respect of
matters of local concern to be exercised
by the local legislative bodies thereof.
(Sec. 5, Art. X, 1987 Constitution)
2. When allowed by the Constitution.

Note: The Congress may, by law,

authorize the President to fix within
specified limits, subject to such limitations
and restrictions as it may impose, tariff
rates, import and export quotas, tonnage
and wharfage dues and other duties or
imposts within the framework of the
national development program of the
government. (Sec. 28 [2], Art. VI, 1987
Constitution)

3. When the delegation relates merely to

administrative implementation that
may call for some degree of
discretionary powers under a set of
sufficient standard expressed by law
(Cervantes v. Auditor General, G.R. No.
L-4043, May 26, 1952) or implied from
the policy and purpose of the act.
(Maceda v. Macaraig, G.R. No. 88291,
June 8, 1993)

Note: Technically, this does not amount to

a delegation of the power to tax because
the questions which should be
determined by Congress are already
answered by Congress before the tax law
leaves Congress.

Q: What is the scope of legislative power in

taxation?

A: The following are the scope of legislative

power in taxation:
1. The determination of: [SAP-MAKS]
a. Subjects of taxation (persons,
property, occupation, excises or
privileges to be taxed, provided
they are within the taxing
jurisdiction)
b. Amount or Rate of tax
c. Purposes for which taxes shall be
levied provided they are public
purposes
d. Method of collection

Note: This is not exclusive to

Congress.

e. Apportionment of the tax (whether

the tax shall be of general
application or limited to a
particular locality, or partly general
and partly local)
f. Kind of tax to be collected
g. Situs of taxation
2. The grant tax exemptions and
condonations.
3. The power to specify or provide for
administrative as well as judicial
remedies (Philippines Petroleum
Corporation v. Municipality of Pililla,
G.R. No.85318, June 3, 1991).

Q: In order to raise revenue for the repair and

maintenance of the newly constructed City Hall
of Makati, the City Mayor ordered the collection

of P1.00, called elevator tax , every time a

person rides any of the high-tech elevators in the
City Hall during the hours of 8am to 10am and
4pm to 6pm. Is the elevator tax a valid
imposition?

A: No. The imposition of a tax, fee or charge or

the generation of revenue under the Local
Government Code, shall be exercised by the
Sanggunian of the local government unit
concerned through an appropriate ordinance
[Sec. 132, LGC]. The city mayor alone could not
order the collection of the tax; as such, the
elevator tax is an invalid imposition. (2003 Bar
Question)

Q: Discuss the Marshall dictum The power to

tax is the power to destroy in the Philippine
setting.

A: The power to tax includes the power to

destroy. Taxation is a destructive power which
interferes with the personal and property rights
of the people and takes from them a portion of
their property for the support of the
government. (McCulloch vs. Maryland, 4 Wheat,
316 4 L ed. 579, 607)

Note: It is more reasonable to say that the maxim

the power to tax is the power to destroy is to
describe not the purposes for which the taxing
power may be used but the degree of vigor with

which the taxing power may be empoloyed in order

to raise revenue. (Cooley).

Q: Justice Holmes once said: The power to Tax

is not the power to destroy while this court
(Supreme Court) sits . Explain.

A: While taxation is said to be the power to

destroy, it is by no means unlimited. When a
legislative body having the power to tax a certain
subject matter actually imposes such a
burdensome tax as effectually to destroy the
right to perform the act or to use the property
subject to the tax, the validity of the enactment
depends upon the nature and character of the
right destroyed. If so great an abuse is
manifested as to destroy natural and
fundamental rights which no free government
consistently violate, it is the duty of the judiciary
to hold such an act unconstitutional.

Q: How will you reconcile the two dicta?

A: The power to tax involves the power to

destroy since the power to tax includes the
power to regulate even to the extent of
prohibition or destruction, as when the power to
tax is used validly as an implement of police
power in discouraging and prohibiting certain
things or enterprises inimical to the public
welfare.

While the power to tax is so unlimited in force

and so searching in extent that the courts
scarcely venture to declare that it is subject to
any restrictions whatever, it is subject to the
inherent and constitutional limitations which are
intended to prevent abuse on the exercise of the
otherwise plenary and unlimited powers. It is the
court s role to see to it that the exercise of the
power does not transgress these limitations.

The power to tax therefore, must not be

exercised in an arbitrary manner. It should be
exercised with caution to minimize injury to
proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the

tax collector kill the hen that lays the golden egg.
(Roxas et. al vs. CTA et. al, L-25043, April 26,
1968)

Taxpayers may seek redress before the courts in

case of illegal imposition of taxes and
irregularities. The Constitution, as the
fundamental law, overrides any legislative or
executive act that runs counter to it. In any case,
therefore, where it can be demonstrated that the
challenged statutory provision fails to abide by its
command, then the court must declare and
adjudge it null. (Sison Jr. v. Ancheta, G.R. No. L59431, July 25, 1984)

Note: Marshall s view refers to a valid tax while

Holmes view refers to an invalid tax.

Q: Is taxation subject to judicial review?

A:
GR: Courts have no power to inquire or
interfere in the wisdom, objective, motive or
expediency in the passage of a tax law, this
being purely legislative in character.
(Tolentino v. Sec. of Finance, G.R. No.115455,
August 25, 1994)

XPN: The courts may examine legislative acts

if they violate applicable constitutional
limitations or restrictions.

Q: The NIRC was amended by BP 135, effectively

broadening the rates of tax on individual income
taxes. Sison brought a taxpayer s suit alleging
that the amendatory provision was arbitrary,
amounting to class legislation, oppressive and
capricious in character. He concludes that both
the equal protection and due process clauses
had been transgressed, as well as the rule
requiring uniformity in taxation. In response
thereto, the Solicitor General stated in his
answer that BP 135 is a valid exercise of the
State s power to tax. Decide.

A: Being an attribute of sovereignty, the power to

tax is the strongest of all the powers of
government. So powerful that Chief Justice
Marshall once said that, the power to tax
involves the power to destroy. However, the
power to tax is restricted by the equal protection
and due process clauses of the Constitution.
Hence, Justice Frankfurter could rightfully
conclude: The web of unreality spun from
Marshall s famous dictum was brushed away by
one stroke of Mr. Justice Holmes s pen stating
that The power to tax is not the power to
destroy while this court sits. So it is in the
Philippines.

CHARACTERISTICS OF TAXATION

Q: What are the characteristics of the power to

tax?

A: CUPS
1. Comprehensive - It covers persons,
businesses, activities, professions, rights
and privileges.
2. Unlimited - It is so unlimited in force and
searching in extent that courts scarcely
venture to declare that it is subject to
any restrictions, except those that such
rests in the discretion of the authority
which exercises it. (Tio v. Videogram
Regulatory Board, G.R. No. 75697, June
18, 1987)
3. Plenary - It is complete. Under the NIRC,
the BIR may avail of certain remedies to
ensure the collection of taxes.
4. Supreme - It is supreme insofar as the
selection of the subject of taxation is
concerned.

Q: Explain

wide spectrum of taxation .

A: It means that taxation is one that extends to

every business, trade or occupation; to every
object of industry; use or enjoyment; to every
specie of possession.

It imposes a burden which in case of failure to

discharge the same may be followed by the
seizure and confiscation of property after the
observance of due process.

POWER OF TAXATION COMPARED WITH OTHER

POWERS OF THE STATE

Q: What are the distinctions among the three

inherent powers of the State?

A:
TAXATION
POLICE
POWER
EMINENT
DOMAIN
Authority who exercises the power
Government or
its political
subdivision
Government or
its political
subdivision
Government or
public service
companies and
public utilities
Purpose
To raise revenue
in order to
support of the
Government
Promotion of
general welfare
through
regulations
To facilitate the
taking of private
property for
public purpose
Persons affected
Upon the
community or
class of
Upon
community or
class of
On an individual
as the owner of
a particular

individuals
individuals
property
Amount of monetary imposition
No ceiling
except inherent
limitations
Limited to the
cost of
regulation,
issuance of
license or
surveillance
No imposition,
the owner is
paid the fair
market value of
his property

Benefits received
Protection of a
secured
organized
society, benefits
received from
government/ No
direct benefit
Maintenance of
healthy
economic
standard of
society/ No
direct benefit
The person
receives the fair
market value of
the property
taken from him/
direct benefit
results
Non-Impairment of contracts
Tax laws
generally do not
impair contracts,

unless:
government is
party to contract
granting
exemption for a
consideration
Contracts may
be impaired
Contracts may
be impaired

Q: What are the similarities between taxation,

eminent domain and police power?

A:
1. They are inherent powers of the State.
2. All are necessary attributes of the
sovereign.
3. They exist independently of the
Constitution.
4. They constitute the 3 methods by which
the State interferes with private rights
and property.
5. They presuppose equivalent
compensation.
6. The Legislature can exercise all 3
powers.

Note: It is incorrect to state that the 3

powers are all exercised by the legislature
because there are other entities which
can exercise the said powers.

PURPOSE OF TAXATION

Q: What are the purposes of taxation?

A:
1. Revenue

to raise funds or property to

enable the State to promote the

general welfare and protection of the
people.

2. Non-revenue [PR2EP]
a. Promotion of general welfare
taxation may be used as an
implement of police power to
promote the general welfare of the
people.
b. Regulation of activities/industries
c. Reduction of Social inequality a
progressive system of taxation
prevents the undue concentration
of wealth in the hands of few
individuals. Progressivity is based
on the principle that those who are
able to pay more should shoulder
the bigger portion of the tax
burden.
d. Encourage economic growth the
grant of incentives or exemptions
encourage investment thereby
stimulating economic activity.
e. Protectionism In case of foreign
importations, protective tariffs and
customs are imposed to protect
local industries.

Q: Central Luzon Drug (CLD) operated 6

drugstores under the name and style Mercury
Drug . CLD granted 20% sales discount to senior
citizens pursuant to RA 7432 and its
Implementing Rules. CLD filed with petitioner a
claim for tax refund/credit in the amount
allegedly arising from the 20% sales discount.
CIR was ordered to issue a tax credit certificate
in favor of CLD. Can taxation be used as an
implement for the exercise of the power of
eminent domain?

A: Yes. Tax measures are but enforced

contributions exacted on pain of penal sanctions
and clearly imposed for a public purpose. The
20% discount given to senior citizens on
pharmacy products was considered a property, in
the form of a supposed profit, taken from the
drugstore and used for public use, by means of
giving it directly to individual senior citizen. Be it
stressed that the privilege enjoyed by senior
citizens does not come directly from the State,
but rather from the private establishments
concerned. Accordingly, the tax credit benefit
granted to these establishments can be deemed
as their just compensation for private property
taken by the State for public use. (CIR v. Central
Luzon Drug, G.R. No. 159647, Apr. 15, 2005)

PRINCIPLES OF SOUND TAX SYSTEM

Q: What arethe basic principles of a sound tax

system (Canons of Taxation)?

A: FAT
1. Fiscal adequacy
a. Revenue raised must be sufficient
to meet government/public
expenditures and other public
needs. (Chavez v. Ongpin, G.R. No.
76778, June 6, 1990)
2. Administrative feasibility
a. Tax laws must be clear and
concise.
b. Capable of effective and efficient
enforcement.
c. Convenient as to time and manner
of payment; must not obstruct
business growth and economic
development.
3. Theoretical justice
a. Must take into consideration the
taxpayer s ability to pay (Ability to
Pay Theory).
b. Art. VI, Sec. 28(1), 1987
Constitution mandates that the
rule on taxation must be uniform
and equitable and that the State
must evolve a progressive system
of taxation.

Q: What are the distinctions among the basic

principles of a sound tax system?

A:
Fiscal Adequacy
Administrative

Feasibility
Theoretical
Justice
Meaning
Sources of
revenues must
be adequate to
meet
government
expenditures
and their
variations
The
enforcement
should be
effective and
efficient
Impsition must
be based on the
taxpayer s
ability to pay
Constitutional Basis
Art. VI, Sec.
28[1]
Benefits
No need to
incur loans; no
more budgetary
deficit
Conducive to
economic
growth and
development; a
simplified tax
system
Proportionate
share in the
burden of
paying taxes

Q: Frank Chavez, as taxpayer, and Realty Owners

Association of the Philippines, Inc. (ROAP),
alleged that E.O.73 providing for the collection
of real property taxes as provided for under
Section 21 of P.D.464 (Real Property Tax Code) is
unconstitutional because it accelerated the
application of the general revision of
assessments to January 1, 1987 thereby
increasing real property taxes by 100% to 400%
on improvements, and up to 100% on land which
would necessarily lead to confiscation of
property. Is the contention of the Chavez and
ROAP correct?

A: No. To continue collecting real property taxes

based on valuations arrived at several years ago,
in disregard of the increases in the value of real
properties that have occurred since then, is not in
consonance with a sound tax system. Fiscal
adequacy, which is one of the characteristics of a
sound tax system, requires that sources of
revenues must be adequate to meet government
expenditures and their variations. (Chavez v.
Ongpin, G.R. No. 76778, June 6, 1990)

Q: Is the VAT law violative of the administrative

feasibility principle?

A: No. The VAT law is principally aimed to

rationalize the system of taxes on goods and
services. Thus, simplifying tax administration and
making the system more equitable to enable the
country to attain economic recovery. (Kapatiran
ng Mga Naglilingkod sa Pamahalaan v. Tan,
G.R.No.81311, June 30, 1988)

THEORY AND BASIS OF TAXATION

Q: What are the theories in taxation?

A: The theories underlying the power of taxation

are the following:
1. Lifeblood theory (Necessity theory)
2. Benefits-protection theory (Doctrine of

Symbiotic Relationship)

Lifeblood Theory/Necessity Theory

Q: Discuss the meaning and the implications of

the statement: Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need.

A: The phrase expresses the underlying basis of

taxation which is governmental necessity, for
indeed, without taxation, a government can
neither exist nor endure.

Taxation is a principal attribute of sovereignty.

The exercise of the taxing power derives its
source from the very existence of the State whose
social contract with its citizens obliges it to
promote public interest and the public good.

In the case of Valley Trading Co. v. CFI G.R. No.

495529, March 31, 1989, the Supreme Court
ruled that the damages that may be caused a
taxpayer by being made to pay the taxes cannot
be said to be as irreparable as it would negate the
Government ability to collect taxes. (1991 Bar
Question)

Benefits-Protection Theory/
Symbiotic Relationship Doctrine

Q: What is the Benefits-Protection Theory

(Symbiotic Relationship Doctrine) in taxation?

A: It involves the power of the State to demand

and receive taxes based on the reciprocal duties
of support and protection between the State and
its citizen.

Every person who is able must contribute his

share in the burden of running the government.
The government for its part is expected to
respond in the form of tangible and intangible
benefits intended to improve the lives of the
people and enhance their material and moral
values. (CIR v. Algue, G.R. No. L-28896, February
17, 1988)

Special benefits to taxpayers are not required. A

person cannot object to or resist the payment of
taxes solely because no personal benefit to him
can be pointed out arising from the tax. (Lorenzo
v. Posadas, 64 Phil. 353)

Q: What are the principles involving the doctrine

of symbiotic relationship/benefits protection?

A: It is a legal duty on the part of the citizen to

pay taxes to support the Government.

On the other hand, it is a reciprocal duty on the

part of the Government to provide protection and
benefits.

DOCTRINES IN TAXATION

Prospectivity of Tax laws

Q: What is the Doctrine of Prospectivity of tax

laws?

A:
GR: Taxes must only be imposed prospectively.

XPN: If the law expressly provides for

retroactive imposition. Retroactive application
of revenue laws may be allowed if it will not
amount to denial of due process.

Q: Is the prohibition against ex post facto law

applicable in taxation?

A: No. The prohibition against ex post facto laws

applies only to criminal matters and not to laws
which are civil in nature.
Note: When it comes to civil penalties like fines and
forfeiture (except interest), tax laws may be applied
retroactively unless it produces harsh and
oppressive consequences which violate the
taxpayer s constitutional rights regarding equity and
due process. But criminal penalties may arising
from tax violations may not be given retroactive
effect.

Q: Due to an uncertainty whether or not a new

tax law is applicable to printing companies, DEF
Printers submitted a legal query to the BIR on
that issue. The BIR issued a ruling that printing
companies are not covered by the new law.
Relying on this ruling, DEF Printers did not pay
said tax.

Subsequently, however, the BIR reversed the

ruling and issued a new one stating that the tax
covers printing companies. Could the BIR now

assess DEF Printers for back taxes corresponding

to the years before the new ruling? Reason
briefly.

A: No. The reversal of the ruling shall not be given

a retroactive application, if said reversal will be
prejudicial to the taxpayer. Therefore, the BIR
cannot assess DEF Printers for back taxes because
it would be violative of the principle of nonretroactivity of rulings and doing so would result
to grave injustice to the taxpayer who relied on
the first ruling in good faith. (Sec. 246, NIRC;
Commissioner v. Burroughs, Ltd., G.R. No. L66653, June 19, 1986) (2004 Bar Question)

Note: PBCom v. CIR (GR 112024), 28 January

1999.

The regulation is inconsistent with the law and

the government is not estopped from the
mistake of its agents.

Rulings promulgated by the CIR shall be

retroactive in the following cases:
a. Where the taxpayer deliberately
misstates or omits material facts
from his return or any document
required of him by the BIR;
b. Where the facts subsequently
gathered by the BIR are materially
different from the facts on which
the ruling is based; or
c. Where the taxpayer acted in bad
faith.

Doctrine of Imprescriptibility

Q: Discuss the Doctrine of Imprescriptibility.

A: Taxes are imprescriptible as they are the

lifeblood of the government. However, tax

statutes may provide for statute of limitations.

Note: Although the NIRC provides for the limitation

in the assessment and collection of taxes imposed,
such prescriptive period will only be applicable to
those taxes that were returnable. The prescriptive
period shall start from the time the taxpayer files the
tax return and declares his liability. (Collector v.
Bisaya Land Transportaion Co., 1958)

Double Taxation

Q: Define double taxation.

A: Otherwise described as direct duplicate

taxation , the two taxes must be imposed on the
same subject matter, for the same purpose, by
the same taxing authority, within the same
jurisdiction, during the same taxing period; and
the taxes must be of the same kind or character.
(City of Manila v. Coca Cola Bottlers Philippines,
G.R. No. 181845, Aug. 4, 2009)

Q: What are the kinds of double taxation?

A:
1. As to validity
a. Direct Double Taxation
(Obnoxious) - Double taxation in
the objectionable or prohibited
sense since it violates the equal
protection clause of the
Constitution.

b. Indirect Double Taxation - Not

repugnant to the Constitution.
i. This is allowed if the taxes are
of different nature or
character imposed by
different taxing authorities.
ii. Generally, it extends to all
cases when one or more
elements of direct taxation
are not present.

2. As to scope a. Domestic Double Taxation - When

the taxes are imposed by the local
and national government within
the same State.
b. International Double Taxation occurs when there is an imposition
of comparable taxes in two or
more states on the same taxpayer
in respect of the same subject
matter and for identical periods.

Q: What are the elements of direct double

taxation?

A:
1.
a.
b.
c.
d.

The same:
object or property is taxed twice
by the same taxing authority
for the same taxing purpose
within the same tax period

2. Taxing all the objects or property for

the first time without taxing all of them
for the second time.

Q: Is double taxation prohibited?

A: No, there is no Constitutional prohibition

against double taxation. However, direct double
taxation is unconstitutional as it results in

violation of substantive due process and equal

protection clause.

Q: X, a lessor of a property, pays real estate

tax on the premises, a real estate dealer s tax
based on rental receipts and income tax on the
rentals. He claims that this is double taxation.
Decide.

A: There is no double taxation. The real estate

tax is a tax on property; the real estate dealer s
tax is a tax on the privilege to engage in business;
while the income tax is a tax on the privilege to
earn an income. These taxes are imposed by
different taxing authorities and are essentially of
different kind and character. (Villanueva v. Iloilo,
GR L-26521, Dec. 28, 1968) (1996 Bar Question)

Q: BB Municipality has an ordinance which

requires that all stores, restaurants, and other
establishments selling liquor should pay an
annual fee of P20,000.00. Subsequently, the
municipal board proposed an ordinance
imposing a sales tax equivalent to 5% of the
amount paid for the purchase or consumption of
liquor in stores, restaurants and other
establishments. The municipal mayor, CC,
refused to sign the ordinance on the ground that
it would constitute double taxation. Is the
refusal of the mayor justified? Reason briefly.

A: No. The impositions are of different nature and

character. The fixed annual fee is in the nature of
a license fee imposed through the exercise of
police power, while the 5% tax on purchase or
consumption is a local tax imposed through the
exercise of taxing powers. Both license fee and
tax may be imposed on the same business or
occupation, or for selling the same article and this
is not in violation of the rule against double
taxation. (Compania General de Tabacos de
Filipinas v. City of Manila, G.R. No. L-16619, June
29, 1963) (2004 Bar Question)

Q: What are the methods to ease the burden of

double taxation?

A: Local legislation and tax treaties may provide

for:
1. Tax credit
an amount subtracted from
taxpayer s tax liability in order to arrive
at the net tax due.
2. Tax deduction an amount subtracted
from the gross amount on which a tax
is calculated.
3. Tax exemption a grant of immunity to
particular persons or entities from the
obligation to pay taxes.
4. Imposition of a rate lower than the
normal domestic rate

Q: SC Johnson and Son, Inc., is a domestic

corporation entered into an agreement with SC
Johnson and Son-USA, a non-resident foreign
corporation, pursuant to which SC Johnson
Philippines was granted the right to use the
trademark, patents and technology owned by
the SC Johnson and Son-USA for the use of
trademark and technology. SC Johnson and Son,
Inc was obliged to pay SC Johnson and Son-USA
royalties and subjected the same to 25%
withholding tax on royalty payments. Will the
royalty payments be subject to 10% withholding
tax pursuant to the most favored nation clause
as claimed by SC Johnson Philippines?

A: No, since the RP-US Tax Treaty does not give a

matching credit of 20% for the taxes paid to the
Philippines on royalties as allowed under the RPWest Germany Tax Treaty, respondent cannot be
deemed entitled to the 10% rate granted under
the latter treaty for the reason that there is no
payment of taxes on royalties under similar
circumstances.

Both Art. 13 of the RP-US Tax Treaty and Art.

12(2) of the RP-West Germany Tax Treaty speak
of tax on royalties for the use of trademark,
patents, and technology. The entitlement of the
10% rate by US firms despite the absence of
matching credit (20% for royalties) would
derogate from the design behind the most
favored nation clause to grant equality of
international treatment since the tax burden laid
upon the income of the investor is not the same
in the two countries. The similarity in the
circumstances of payment of taxes is a condition
for the enjoyment of most favored nation
treatment precisely to underscore the need for
equality of treatment.

The RP-US Tax Treaty is just one of a number of

bilateral treaties which the Philippines have
entered into for the avoidance of double taxation.
The purpose of these international agreements is
to reconcile the national fiscal legislation of the
contracting parties in order to help the taxpayer
avoid international juridical double taxation.
(Commissioner v. SC Johnson and Son, Inc., G.R.
No. 127105, June 25, 1999)

Q: What is the purpose of the most-favored

nation clause?

A: The most favored nation clause in a bilateral

tax treaty is meant to ensure that the treaty
partner will always enjoy the same privileges as
that another party which is granted more
favorable treatment. This is an important clause
in treaties, specially with the passage of time. It is
to grant to the contracting parties treatment not
less favorable than that which has been or may
be granted to the most favored among other
countries. It is intended to establish the principle
of equality of international treatment by
providing that the citizens or subjects of the
contracting nations to enjoy the privileges

accorded by either party to those of the most

favored nation. The essence of the principle is to
allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to
which the country of residence of such taxpayer is
also a party provided that the subject matter of
taxation, in this case, royalty income, is the same
as that in the tax treaty under which the taxpayer
is liable.

Q: Upon the passage of the Local Autonomy Act

(RA 2264), the City of Iloilo Board passed an
ordinance imposing municipal license tax on
persons engaged in the business of operating
tenement houses. Is the ordinance
unconstitutional on the ground of double
taxation since there is payment of both real
estate tax and the tenement tax?

A: No. It is a well-settled rule that a license tax

may be levied upon a business or occupation
although the land or property used in connection
therewith is subject to property tax. The State
may collect an ad valorem tax on property used in
a calling, and at the same time impose a license
tax on that calling, the imposition of the latter
kind of tax being in no sense a double tax. The
two taxes are not the same kind or character.
(Villanueva v. Iloilo, GR L-26521, Dec. 28,1968)

Escape from Taxation

Q: What are the basic forms of escape from

taxation?

A: SCATE2
1.
2.
3.
4.
5.
6.

Shifting
Capitalization
Avoidance
Transformation
Evasion
Exemption

Q: What is shifting?

A: The transfer of the burden of tax by the

original payer or the one on whom the tax was
assessed or imposed to another or someone else
without violating the law.

Q: What are the kinds of shifting?

A:
1. Forward shifting
When the burden of
tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer.
2. Backward shifting When the burden
is transferred from the consumer
through the factors of distribution to
the factors of production.

3. Onward shifting
When the tax is
shifted two or more times either
forward or backward.

Q: In what kind of taxes does it apply?

A: It applies to indirect taxes since the law allows

the burden of the tax to be transferred. In case of
direct tax, the shifting of burden can only be via a
contractual provision.

Note: Examples of taxes when shifting may apply

are VAT, percentage tax, excise tax on excisable
articles, ad valorem tax that oil company pays to BIR
upon removal of petroleum products from its
refinery.

Q: What is impact of taxation?

A: Otherwise known as the burden of taxation, it

is the economic cost of the tax. The impact of
taxation may fall on another person not
statutorily liable to pay the tax.

Q: What is incidence of taxation?

A: The incidence of taxation is upon the person

statutorily liable to pay the tax.

Note: Where the burden of the tax is shifted to the

purchaser, the amount passed on to it is no longer a
tax but becomes an added cost on the goods
purchased, which constitutes a part of the purchase
price.

Q: What is tax avoidance?

A: It is the scheme where the taxpayer uses

legally permissible alternative method of
assessing taxable property or income, in order to
avoid or reduce tax liability.

Note: Also known as Tax Minimization, tax

avoidance is the tax saving device within the means
sanctioned by law. This method should be used by
the taxpayer in good faith and at arms length.
(Commissioner v. Estate of Benigno Toda Jr., G.R.
No. 30554, Feb 28, 1983)

Q: What is tax evasion?

A: It is the scheme where the taxpayer uses

illegal or fraudulent means to defeat or lessen
payment of a tax.

Note: Tax evasion is a scheme used outside of those

lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or
criminal liabilities (Commissioner v. Estate of
Benigno Toda Jr. G.R. No. 30554, Feb. 28, 1983). Tax
evasion is somestimes referred to as Tax Dodging.

Q: What are the elements to be considered in

determining that there is tax evasion?

A: ESC
1. End to be achieved, i.e., payment of
less than that known by the taxpayer to
be legally due, or non-payment of tax
when it is shown that the tax is due;
2. Accompanying State of mind which is
described as being evil, in bad faith,
willful or deliberate and not accidental;
and
3. Course of action which is unlawful.

Q: Distinguish tax avoidance from tax evasion?

A:
TAX AVOIDANCE
TAX EVASION
Validity
Legal and not subject to
criminal penalty
Illegal and subject to
criminal penalty
Effect
Minimization of taxes
Almost always results in
absence of tax payment.

Q: What may be used as evidence to prove tax

evasion?

A:
1. Failure of taxpayer to declare for
taxation purposes his true and actual
income derived from business for two
(2) consecutive years; (Republic v.
Gonzales, G.R. No. L-17744, April 30,
1965)
2. Substantial under declaration of
income in the income tax return for
four (4) consecutive years coupled
intentional overstatement of
deductions. (Perez v. CTA, G.R. No. L10507, May 30, 1958)

Q: CIC entered into an alleged simulated sale of

a 16-storey commercial building. CIC authorized
Benigno Toda, Jr., its President to sell the Cibeles
Building and the two parcels of land on which
the building stands. Toda purportedly sold the
property for P100 million to Altonaga, who, in
turn, sold the same property on the same day to
Royal Match Inc. (RMI) for P200 million
evidenced by Deeds of Absolute Sale notarized
on the same day by the same notary public. For
the sale of the property to RMI, Altonaga paid
capital gains tax in the amount of P10 million.

The BIR sent an assessed deficiency income tax

arising from the sale alleging that CIC evaded the
payment of higher corporate income tax of 35%
with regard to the resulting gain. Is the scheme
perpetuated by Toda a case of tax evasion or tax
avoidance?

A: It is a tax evasion scheme. The scheme

resorted to by CIC in making it appear that there
were two sales of the subject properties, i.e.,
from CIC to Altonaga, and then from Altonaga to
RMI cannot be considered a legitimate tax
planning (one way of tax avoidance). Such
scheme is tainted with fraud.

In the case, it is obvious that the objective of the

sale to Altonaga was to reduce the amount of tax
to be paid especially that the transfer from him to
RMI would then subject the income to only 5%
individual capital gains tax and not the 35%
corporate income tax. (Commissioner v. Benigno
Toda Jr., GR No. 147188, Sept. 14, 2004)

Q: What is capitalization?

A: It is the reduction in the price of the taxed

object equal to the capitalized value of future
taxes which the purchaser expects to be called
upon to pay.

Q: What is transformation?

A: It is the scheme where the manufacturer or

producer upon whom the tax has been imposed,
fearing the loss of his market if he should add the
tax to the price, pays the tax and endeavors to
recoup himself by improving his process of
production, thereby turning out his units of
products at a lower cost.

Q: Mr. Pascual s income from leasing his

property reaches the maximum rate of tax
under the law. He donated of his said
property to a non-stock, non-profit educational
institution whose income and assets are

actually, directly, and exclusively used for

educational purposes, and therefore qualified
for tax exemption under Art.XIV, Sec. 4 (3) of
the Constitution and Sec. 3 (h) of the Tax Code.
Having thus transferred a portion of his said
asset, Mr. Pascual succeeded in paying a lesser
tax on the rental income derived from his
property. Is there tax avoidance or tax evasion?
Explain.

A: Yes. Mr. Pascual has exploited a legally

permissive alternative method to reduce his
income by transferring part of his rental income
to a tax exempt entity through a donation of of
the income producing property. The donation is
likewise exempt from donor s tax. The donation
is the legal means employed to transfer the
incidence of income tax on the rental income.
(2000 Bar Question)

Exemption from Taxation

Q: What is meant by tax exemption?

A: It is the grant of immunity, express or implied,

to particular persons or corporations, from a tax
upon property or an excise tax which persons or
corporations generally within the same taxing
districts are obliged to pay.

Q: Discuss the nature of tax exemptions.

A:
1. Personal in nature and covers only
taxes for which the grantee is directly
liable.

Note: It cannot be transferred or assigned

by the person to whom it is given without
the consent of the State.

2. Strictly construed against the taxpayer.

3. Exemptions are not presumed. But
when public property is involved,
exemption is the rule, and taxation, the
exception.

Q: What are the kinds of tax exemptions?

A:
As to basis
1. Constitutional
Immunities from taxation which
originate from the Constitution.
2. Statutory Those which emanate from
legislation.
3. Contractual Agreed to by the taxing authority in
contracts lawfully entered into by them under
enabling laws.
4. Treaty
5. Licensing ordinance
As to form
1. Express Expressly granted by organic or statute
law.
2. Implied When particular persons, properties or
excises are deemed exempt as they fall outside
the scope of the taxing provision.
As to extent
1. Total

Connotes absolute immunity.

2. Partial One where a collection of a part of the tax

is dispensed with.
As to object
1. Personal
persons.

Granted directly in favor of certain

2. Impersonal
Granted directly in favor of a certain
class of property.

Q: What are the principles governing tax

exemptions?

A:
1. Tax exemptions are highly disfavored in
law.
2. Tax exemptions are personal and nontransferable.
3. He who claims an exemption must
justify that the legislature intended to
exempt him by words too plain to be
mistaken. He must convincingly prove
that he is exempted.
4. It must be strictly construed against the
taxpayer.
5. Constitutional grants of tax exemptions
are self-executing.

Note: Deductions for income tax

purposes partake of the nature of tax
exemptions, hence, they are also be
strictly construed against the taxpayer.
6. Tax exemption is generally revocable.
7. In order to be irrevocable, the tax
exemption must be founded on a
contract or granted by the Constitution.
8. The congressional power to grant an
exemption necessarily carries with it
the consequent power to revoke the
same.
9. Revocation are constitutional even
though the corporate do not have to
perform a reciprocal duty for them to
avail of tax exemptions.

Q: What other grants are in the nature of tax

exemptions?

A: The following are also in the nature of tax

exemptions:
1. Tax amnesties
2. Tax condonations
3. Tax refunds

Q: Are all refunds in the nature of tax

exemptions?

A: No. A tax refund may only be considered as a

tax exemption when it is based either on a taxexemption statute or a tax-refund statute. Tax
refunds or tax credits are not founded principally
on legislative grace, but on the legal principle of
quasi-contracts against a person s unjust
enrichment at the expense of another.

Note: The erroneous payment of tax as a basis for a

claim of refund may be considered as a case of
solutio indebiti, which the government is not
exempt from its application and has the duty to
refund without any unreasonable delay what it has
erroneously collected.

Compensation or Set-Off

Q: When does compensation or set-off take

place?

A: Compensation or set-off take place when two

persons, in their own right, are creditors and
debtors of each other (Article 1278, Civil Code).

Q: What are the rules governing compensation

or set-off as applied in taxation?

A:
GR: No set-off is admissible against the

demands for taxes levied for general or local

governmental purposes.

Note: Taxes are not in the nature of contracts

between the parties but grow out of duty to, and
are positive acts of the government to the making
and enforcing of which, the personal consent of
the individual taxpayer is not required. (Francia v.
IAC, A.M. No. 3180, June 29, 1988)

XPN: Where both of the claims of the

government and the taxpayer against each
other have already become due, demandable,
and fully liquidated, compensation takes place
by operation of law and both obligations are
extinguished to their concurrent amounts. In
the case of the taxpayer s claim against the
government, the government must have
appropriated the amount thereto. (Domingo
vs. Garlitos, G.R. No. L-18849, June 29, 1963)

Q: Can an assessment for a local tax be the

subject of set-off or compensation against a
final judgment for a sum of money obtained by
a taxpayer against the local government that
made the assessment?

A: No. Taxes and debts are of different nature

and character. Hence, no set-off or compensation
between the two different classes of obligations
is allowed. The taxes assessed or the obligation of
the taxpayer arising from law, while the money
judgment against the government is an
obligation, arising from contract, whether express
or implied. Inasmuch as taxes are not debts, it
follows that the two obligations are not

susceptible to set-off or legal compensation.

(2005 BarQuestion)

Q: What is the Doctrine of Equitable

Recoupment?

A: It is a principle which allows a taxpayer, whose

claim for refund has been barred due to
prescription, to recover said tax by setting off the
prescribed refund against a tax that may be due
and collectible from him. Under this doctrine, the
taxpayer is allowed to credit such refund to his
existing tax liability.

Note: The Supreme Court, rejected this doctrine in

Collector v. UST (G.R. No. L-11274, Nov. 28, 1958),
since it may work to tempt both parties to delay and
neglect their respective pursuits of legal action
within the period set by law.

Compromise

Q: What is meant by compromise?

A: It is an agreement between two or more

persons who, to avoid lawsuit, amicably settle
their differences on such terms and conditions as
they may agree on. It implies the mutual
agreement by the parties in regard to the thing or
subject matter which is to be compromised.

It is a contract whereby the parties, by reciprocal

concessions avoid litigation or put an end to one
already commenced.

Q: When is compromise allowed?

A: Compromises are generally allowed and

enforceable when the subject matter thereof is
not prohibited from being compromised and the
person entering such compromise is duly

authorized to do so.

Q: Who are the persons allowed to enter into

compromise of tax obligations?

A: The law allows the following persons to do

compromise in behalf of the government:
1. BIR Commissioner, as expressly authorized
by the NIRC, and subject to the following
conditions:
a. When a reasonable doubt as to validity
of the claim against the taxpayer
exists; or
b. The financial position of the taxpayer
demonstrates a clear inability to pay
the assessed tax. (Sec.204[A], NIRC)
2. Collector of Customs, with respect to
customs duties limited to cases where the
legitimate authority is specifically granted
such as in the remission of duties (Sec.
709, TCC)
3. Customs Commissioner, subject to the
approval of the Secretary of Finance, in
cases involving the imposition of fines,
surcharges, and forfeitures. (Sec.2316,
TCC)

Tax Amnesty

Q: Define tax amnesty?

A: A tax amnesty, being a general pardon or

intentional overlooking by the state of its
authority to impose penalties on persons
otherwise guilty of evasion or violation of a
revenue or tax law, partakes of an absolute
forgiveness or waiver by the government of its
right to collect what otherwise would be due to
it, and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to
relent or are willing to reform a chance to do so
and become a part of the new society with a
clean slate. (Republic v. IAC, 1991)

Q: Distinguish tax amnesty from tax exemption.

A:
TAX AMNESTY
TAX EXEMPTION
Scope of immunity
Immunity from all
criminal, civil and
administrative obligations
arising from nonpayment of taxes
Immunity from civil
liability only

Grantee
General pardon given to
all erring taxpayers
A freedom from a charge
or burden to which
others are subjected
How applied
Applied retroactively
Applied prospectively
Presence of actual revenue loss
There is revenue loss
since there was actually
taxes due but collection
was waived by the
government
None, because there was
no actual taxes due as the
person or transaction is
protected by tax
exemption.

Q: Does the mere filing of tax amnesty return

shield the taxpayer from immunity against

prosecution?

A: No. The taxpayer must have voluntarily

disclosed his previously untaxed income and
must have paid the corresponding tax on such
previously untaxed income. (People v. Judge
Castaeda, 165 SCRA 327[1988])

CONSTRUCTION AND INTERPRETATION OF TAX

LAWS

Q: What is the nature of tax laws?

A: Tax laws are:

1. Not political
2. Civil in nature
3. Not penal in character

Q: How are tax laws construed?

A:
1. Generally, no person or property is
subject to tax unless within the terms
or plain import of a taxing statute.
2. Tax laws are generally prospective in
nature.
3. Where the language is clear and
categorical, the words employed are to
be given their ordinary meaning.
4. When there is doubt, tax laws are
strictly construed against the
Government and liberally in favor of
the taxpayer.

Note: Taxes, being burdens, are not to be

presumed beyond what the statute
expressly and clearly provides.

5. Provisions of the taxing act are not to

be extended by implication.
6. Tax laws are special laws and prevail
over general laws.

Q: State the rule on construction of tax

exemptions.

A:
GR: Strict construction of tax exemptions
against grantee.

XPN:
1. If the statute granting exemption
expressly provides for liberal
interpretation;
2. In case of exemptions of public
property;
3. Those granted to traditional
exemptees;
4. Exemptions in favor of the
government;
5. Exemption by clear legislative intent.
6. In case of special taxes (relating to
special cases affecting special persons).

Note: The intent of the legislature to grant tax

exemption must be in clear and unmistakable terms.
Exemptions are never presumed. The burden of
establishing right to an exemption is upon the
claimant.

Q: Are the tax exemptions strictly construed

against government political subdivision or
instrumentality?
A: No. It is a recognized principle that the rule on
strict interpretation does not apply in the case of
exemptions in favor of a government political
subdivision or instrumentality. The reason for the
strict interpretation does not apply in the case of
exemptions running to the benefit of the
government itself or its agencies. In such a case,
the practical effect of an exemption is merely to
reduce the amount that has to be handled by
government in the course of its operations. For
these reasons, provisions granting exemptions to
government agencies may be construed liberally,
in favor of non-taxability of such agencies.
(Maceda vs. Macaraig, 197 SCRA 771)

Q: How are tax rules and regulations construed?

A: The construction placed by the office charged

with implementing and enforcing the provisions
of a Code should be given controlling weight
unless such interpretation is clearly erroneous.

Q: How are penal provisions of tax laws

construed?

A: Penal provisions are given strict construction

so as not to extend the plain terms thereof that
might createoffenses by mere implication not so
intended by the legislative body. (RP v. Martin,
G.R. No. L-38019, May 16, 1980)

Q: What is meant by the strict construction

rule?

A: When it is said that exemptions must be

strictly construed in favor of the taxing power,
this does not mean that if there is a possibility of
a doubt it is to be at once resolved against the
exemption. It simply means that if, after the
application of all the rules of interpretation for
the purpose of ascertaining the intention of the
legislature, a well founded doubt exists, then the
ambiguity occurs which may be settled by the
rule of strict construction.

Note: Moreover, rulings are not the same as laws or

rules and regulations. They only issue upon query by
a taxpayer.

SCOPE AND LIMITATION OF TAXATION

Q: What are the limitations on the power to

tax?

A:
1. Inherent limitations
proceeds from
the very nature of the taxing power
itself. They are otherwise known as
elements or characteristics of
taxation . [SPINE]
a. Situs or territoriality
b. Public purpose
c. International comity
d. Non-delegability of the taxing
power itself
e. Exemption of the Government

Note: A violation of the inherent limitations

constitutes taking without due process of law.
(Vitug and Acosta, Tax Law and Jurisprudence,
p.4, citing Pepsi Cola vs. Municipality of
Tanauan, 69 SCRA 460)

2. Constitutional Limitations
imposed by the Constitution.
a. General or Indirect

restrictions

i. Due process clause [Sec. 1,

Art. III, Constitution]
ii. Equal protection clause [Sec.
1, Art. III, Constitution]
iii. Freedom of the press [Sec. 4,
Art. III, Constitution]
iv. Religious freedom [Sec. 5, Art.
III, Constitution]
v. Eminent domain [Sec. 9, Art.
III, Constitution]
vi. Non-impairment clause [Sec.
10, Art. III, Constitution]
vii. Law-making process [Sec. 26,
Art. VI, Art. III, Constitution]
viii. Presidential power to grant
reprieves, commutations,
pardons and remit fines and
forfeitures after conviction by
final judgment. [Sec.19, Art.
VII, Constitution]

b. Specific or Direct
i. Non-imprisonment for nonpayment of poll tax [Sec. 20,
Art. III, Constitution]
ii. Taxation shall be uniform and
equitable [Sec. 28(1), Art. VI,
Constitution]
iii. Progressive system of taxation
[Sec. 28(1), Art. VI,
Constitution]
iv. Origin of revenue and tariff
bills [Sec. 24, Art VI,
Constitution]
v. Veto power of the President
[Sec. 27(2), Art. VI,
Constitution]
vi. Delegated authority of the
President to impose tariff
rates, import and export
quotas, tonnage and
wharfage dues [Par. 2, Sec.
28, Art. VI, Constitution]
vii. Tax exemption of charitable
institutions, churches,
parsonages, convents, all
lands, buildings and
improvements actually,
directly or exclusively used.
[Par. 3, Sec. 28, Art. VI,
Constitution]
viii. Voting requirement for tax
exemption [Par. 4, Sec. 28,
Art. VI, Constitution]
ix. No use of public money or
property for religious
purposes [Par. 3, Sec. 28, Art.
VI, Constitution]
x. Special assessments [Par. 3,
Sec. 29, Art. VI, Constitution]
xi. Supreme Court s power to
review judgments or orders of
lower courts [Sec. 5(b), Art.
VIII, Constitution]
xii. Grant of autonomy to local
government units [Secs.5 & 6,
Art. X, Constitution]
xiii. Tax exemption granted to
non-stock, non- profit
educational institutions,
proprietary or cooperative
educational institutions [Sec.
4, Art XIV, Constitution]
xiv. Tax exemption of grants,
endowments, donations or

contributions used actually,

exclusively and directly for
educational purposes. [Sec. 4,
Art XIV, Constitution]

INHERENT LIMITATIONS

Public Purpose

Q: When is tax considered for a public purpose?

A: When it:

1. is for the welfare of the nation and/or

for greater portion of the population;
2. affects the area as a community rather
than as individuals;
3. is designed to support the services of
the government for some of its
recognized objects.

Q: What are the tests in determining public

purpose?

A:
1. Duty test - Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty
of the State as a government to
provide.

Note: The term public purpose is not defined. It is

an elastic concept that can be hammered to fit
modern standards. Jurisprudence states that public
purpose should be given a broad interpretation. It
does not only pertain to those purposes which are
traditionally viewed as essentially government
functions, such as building roads and delivery of
basic services, but also includes those purposes
designed to promote social justice. Thus, public
money may now be used for the relocation of illegal
settlers, low-cost housing and urban agrarian reform
(Planters Products, Inc. v. Fertiphil Corporation,
G.R. No. 166006, Mar. 14, 2008)

2. Promotion of general welfare test Whether the proceeds of the tax

will directly promote the welfare of
the community in equal measure.

Q: Who determines the public purpose for which

a tax law is enacted?

A: Congress. However, this will not prevent the

court from questioning the propriety of such
statute on the ground that the law enacted is not

for a public purpose; but once it is settled that the

law is for a public purpose, the court may no
longer inquire into the wisdom, expediency or
necessity of such tax measure.

Note: If the tax measure is not for public purpose,

the act amounts to confiscation of property.

Q: What are the principles relative to public

purpose?

A:
1. Tax revenue must not be used for
purely private purposes or for the
exclusive benefit of private persons.
2. Inequalities resulting from the singling
out of one particular class for taxation
or exemption infringe no constitutional
limitation because the legislature is free
to select the subjects of taxation.
Note: Legislature is not required to adopt
a policy of all or none for the Congress
has the power to select the object of
taxation. (Lutz v. Araneta, G.R. No. L-7859,
22 December 1955)

3. An individual taxpayer need not derive

direct benefits from the tax.
4. Public purpose is continually expanding.
Areas formerly left to private initiative
now lose their boundaries and may be
undertaken by the government if it is to
meet the increasing social challenges of
the times.
5. The public purpose of the tax law must
exist at the time of its enactment.
(Pascual vs. Secretary of Public Works,
G.R. No. L-10405. 29 December 1960)

Q: Lutz assailed the constitutionality of Section 2

and 3, C.A. 567, which provided for an increase
of the existing tax on the manufacture of sugar,
alleging such tax as unconstitutional and void for
not being levied for a public purpose but for the
aid and support of the sugar industry exclusively.
Is the tax law increasing the existing tax on the

manufacture of sugar valid?

A: Yes. The protection and promotion of the sugar

industry is a matter of public concern. The
legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. Legislative discretion
must be allowed full play, subject only to the test
of reasonableness. If objective and methods alike
are constitutionally valid, there is no reason why
the State may not levy taxes to raise funds for
their prosecution and attainment. Taxation may
be made to implement the State s police power.
(Lutz v. Araneta, G.R. No. l-7859, December 22,
1955)

Q: Is the tax imposed on the sale, lease or

disposition of videograms for a public purpose?

A: Yes. Such tax is imposed primarily for

answering the need for regulating the video
industry, particularly because of the rampant film
piracy, the flagrant violation of intellectual
property rights, and the proliferation of
pornographic videotapes. While the direct
beneficiary of said imposition is the movie
industry, the citizens are held to be its indirect

beneficiaries. (Tio v. Videogram Regulatory Board,

G.R. No. 75697, June 18, 1987)

No Improper Delegation of the Power to Tax

Q: Explain the concept of non-delegation as a

limitation on the power to tax.

A:
GR: The power to tax is exclusively vested in
the legislative body; hence, it may not be
delegated. (Delegata potestas non potest
delegari)

XPNs:
1. Delegation to Local Government
Refers to the power of local
government units to create its own
sources of revenue and to levy taxes,
fees and charges. (Art. X, Sec. 5, 1987
Constitution)
2. Delegation to the President The
authority of the President to fix tariff
rates, import or export quotas, tonnage
and wharfage dues or other duties and
imposts. (Art. VI, Sec. 28(2), 1987
Constitution)
3. Delegation to administrative agencies
When the delegation relates merely to
administrative implementation that
calls for some degree of discretionary
powers under sufficient standards
expressed by law or implied from the
policy and purposes of the Act.
a. Authority of the Secretary of
Finance to promulgate the
necessary rules and regulations for
the effective enforcement of the
provisions of the law. (Sec. 244,
R.A.8424)
b. The Secretary of Finance may,
upon the recommendation of the
Commissioner, require the
withholding of a tax on the items
of income payable. (Sec. 57, R.A.
8424)

Note: As discussed earlier, this is technically not an

exception to the non delegability rule as the questions
have already been answered by Congress (See page 2).

Q: What are the non-delegable legislative

powers?

A: SuPuR2
1. Selection of Subject to be taxed
2. Determination of Purposes for which
taxes shall be levied
3. Fixing of the Rate/amount of taxation
4. Situs of tax
5. Kind of Tax

Q: The Municipality of Malolos passed an

ordinance imposing a tax on any sale or transfer
of real property located within the municipality
at a rate of of 1% of the total consideration of
the transaction. X sold a parcel of land in
Malolos which he inherited from his deceased
parents and refused to pay the aforesaid tax. He
instead filed appropriate case asking that the
ordinance be declared null and void since such a
tax can only be collected by the national
government, as in fact he has paid the BIR the
required capital gains tax.

The Municipality countered that under the

Constitution, each local government is vested
with the power to create its own sources of
revenue and to levy taxes, and it imposed the
subject tax in the exercise of said Constitution
authority. Resolve the controversy.

A: The ordinance passed by the Municipality of

Malolos imposing a tax on the sale or transfer of
real property is void. The Local Government Code
only allows provinces and cities to impose a tax
on the transfer of ownership of real property.
(Secs. 135 and 151, Local Government Code)

Municipalities are prohibited from imposing said

tax that provinces are specifically authorized to
levy.

While it is true that the Constitution has given

broad powers of taxation to LGUs, this
delegation, however, is subject to such limitations
as may be provided by law. (Sec. 5, Art. X, 1987
Constitution) (1991 Bar)

Q: R.A. 9337 (The Value Added Tax Reform Act)

provides that, the President, upon the
recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%) after
any of the following conditions have been
satisfied. (i) value-added tax collection as a
percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth
percent (2 4/5%) or (ii) national government
deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 %).

Was there an invalid delegation of legislative

power?

A: No. There is no undue delegation of legislative

power but only of the discretion as to the
execution of the law. This is constitutionally
permissible.

Congress did not abdicate its functions or unduly

delegate power when it describes what job must
be done, who must do it, and what is the scope of
his authority. The Secretary of Finance, in this
case, becomes merely the agent of the legislative
department, to determine and declare the even
upon which its expressed will takes place. The
President cannot set aside the findings of the
Secretary of Finance, who is not under the
conditions acting as her alter ego or subordinate.
(Abakada Guro Party List v. Ermita, etc., et al., G.
R. No. 168056, September 1, 2005)

Territoriality / Situs

Q: What is meant by situs of taxation?

A: It is the place or authority that has the right to

impose and collect taxes. (Commissioner v.
Marubeni, G.R. No. 137377, Dec.18, 2001)

Q: Explain territoriality as a limitation on the

power to tax.

A:
GR: The taxing power of a country is limited to
persons and property within and subject to its
jurisdiction.

Reasons:
1. Taxation is an act of sovereignty which
could only be exercised within a country s
territorial limits.
2. This is based on the theory that taxes are
paid for the protection and services
provided by the taxing authority which

could not be provided outside the

territorial boundaries of the taxing State.

XPNs:
1. Where tax laws operate outside
territorial jurisdiction
i.e. Taxation of
resident citizens on their incomes
derived abroad.
2. Where tax laws do not operate within
the territorial jurisdiction of the State.
a. When exempted by treaty
obligations; or
b. When exempted by international
comity.

Q: What are the factors that determine the situs

of taxation?
A: ReCiNS2
1.
2.
3.
4.
5.

Residence of the taxpayer

Citizenship of the taxpayer
Nature of the tax
Subject matter of the tax
Source of income.

Q: State the rules in fixing the tax situs.

A:
OBJECT
SITUS
INCOME TAX

Nationality
to RC, DC

applied

Place applied to NRC,

NRA, NRFC

Residence
RA, RFC

applied to

Upon sources of income

derived within and without
the Philippines

Upon sources of income

derived within the
Philippines

Upon sources of income

derived within the
Philippines

PROPERTY TAX

Real Property

Personal Property

Tangible personal
property

Intangible personal
property

Location of the property (lex

rei sitae / lex situs)

Rationale:
1. The taxing authority
has control because of
the stationary and fixed
character of the

property.
2. The place where the
real property is
situated gives
protection to the real
property; hence the
property or its owner
should support the
government of that
place.

Domicile of the owner

(mobilia sequuntur
personam)

Rationale: The place where

the tangible personal
property is found gives its
protection.

Where the property is

physically located although
the owner resides in another
jurisdiction (51 Am Jur. 467)

GR: Situs of intangible

personal property is the
domicile of the owner

pursuant to the principle of

the mobilia sequntur
personam.

XPN:
1. When the property has
acquired a business
situs in another
jurisdiction;
2. When an express
provision of the statute
provide for another
rule.

EXCISE TAX / DONOR S

TAX / ESTATE TAX

Nationality applied to
RC, NRC

Place

applied to NRA

Residence
RA

applied to

Taxed upon their properties

wherever situated

Taxed on properties situated

within the Philippines

Taxed upon their properties

wherever situated

BUSINESS TAX

Place where the act/

business is performed or
occupation is engaged in
VAT

Where the goods, property

or services are destined,
used or consumed

Q: What is meant by the doctrine of mobilia

sequuntur personam?

A: Literally, it means Movable follows the

person/owner . However, a tangible property
may acquire situs elsewhere provided it has a
definite location there with some degree of
permanency.

Q: Birdie Lillian Eye, died at Los Angeles,

California, the place of her alleged last residence
and domicile. Among the properties left was her
one-half conjugal share in 70,000 shares of stock
with Benguet Consolidated Mining Company.
She left a will which was duly admitted to
probate in California where her estate was
administered and settled. Wells Fargo Bank &
Union Trust Co., was duly appointed trustee of
the trust created by the said will. The Federal
and State of California's inheritance taxes due on
said shares have been duly paid. Respondent
sought to subject anew the aforesaid shares of
stock to the Philippines inheritance tax, to which
petitioner objected contending that as to
intangibles, like shares of stock, their situs is in
the domicile of the owner thereof, and,
therefore, their transmission by death
necessarily takes place under his domiciliary
laws. Are the questioned shares of stocks subject
to the Philippine inheritance tax?

A: Yes, inheritance tax is not a tax on property,

but upon transmission by inheritance. Originally,

the settled law is that intangibles have only the

domicile of the decedent at the time of his death
as the situs for the purpose of inheritance tax
(mobilia sequuntur personam). However, such
doctrine has been decreed as a mere "fiction of
law having its origin in considerations of general
convenience and public policy, and cannot be
applied to limit or control the right of the state to
tax property within its jurisdiction," and must
"yield to established fact of legal ownership,
actual presence and control elsewhere, and
cannot be applied if to do so would result in
inescapable and patent injustice."

In the instant case, the actual situs of the shares

of stock is in the Philippines, the corporation
being domiciled therein. And besides, the
certificates of stock have remained in this country
up to the time when the deceased died in
California and that one Syrena McKee, secretary
of the Benguet Consolidated Mining Company,
has the legal title to the certificates of stock held
in trust for the true owner thereof. In other
words, the owner residing in California has
extended here her activities with respect to her
intangibles so as to avail herself of the protection
and benefit of the Philippine laws. (Wells Fargo
Bank and Union Trust v. Collector, G.R. No. L46720, June 28, 1940)

Q: For purposes of estate and donor s taxes,

what are the intangible properties with situs in
the Philippines?

A: Fran-Sha4 (Organized-Established-85-Foreign
Situs)

1. Franchise which must be exercised in

the Philippines;
2. Shares, obligations or bonds issued by
any corporation or sociedad
anonimaOrganized or constituted in the
Philippines in accordance with its laws;
3. Shares, obligations or bonds by any
foreign corporation 85% of its business
is located in the Philippines;
4. Shares, obligations or bonds issued by
any Foreign corporation if such shares,
obligations or bonds have acquired a
business Situs in the Philippines;
5. Shares or rights in any partnership,
business or industry Established in the

Philippines (Sec. 104, NIRC)

Note: These are considered located in the

Philippines, regardless of the residence of the
owner.

Q: What is the situs of taxation in electronic

transactions?

A: As provided for under Section 23 of the ECommerce Act (R.A. 8792), an electronic data
message or electronic document is deemed to be
dispatched at the place where the originator has
its place of business and received at the place
where the addressee has its place of business.
This rules shall also apply to determine the tax
situs of such transaction.

Unless otherwise agreed upon by the parties, the

following rules shall apply in determining the
place of dispatch or receipt of electronic data
message or document:

Factual Situation: originator

or addressee has:
Place of Dispatch
(originator) or receipt
(addressee)
Only one place of business
Place of business
More than one place of
business, with underlying
transaction
Place which has closest
relationship to the
underlying transaction
More than one place of
business, without underlying
transaction
Principal place of
business
No place of business

If originator or
addressee is a natural
person
Habitual
residence
If body corporate
usual place of
residence (place where
it is incorporated or
otherwise legally
constituted)

Note: Section 23 only creates a rebuttable

presumption and applies even if the originator or
addressee has used a laptop or other portable device
to transmit or receive his electronic data message or
electronic document.

If the income or property has acquired multiple

situs, it is possible that certain properties be subject
to tax in several taxing jurisdictions.

Q: What are the remedies available against

multiplicity of situs?

A: Tax laws and treaties with other States may:

1. Exempt foreign nationals from local
taxation and local nationals from
foreign taxation under the principle of
reciprocity;
2. Credit foreign taxes paid from local
taxes due;
3. Allow foreign taxes as deduction from
gross income; or
4. Reduce the Philippine income tax rate.

International Comity

Q: What is international comity?

A: It refers to the respect accorded by nations to

each other because they are sovereign equals.
Thus, the property or income of a foreign state
may not be the subject of taxation by another
state.

Q: Explain international comity as a limitation on

the power to tax.

A: The Philippine Constitution expressly adopted

the generally accepted principles of international
law as part of the law of the land. (Sec. 2, Art. II,
1987 Constitution)
Thus, a State must recognize such generally
accepted tenets of International Law that limit
the authority of the government to effectively
impose taxes upon a sovereign State and its
instrumentalities.

Reasons:
1. In par in parem non habet imperium. As
between equals there is no sovereign.
(Doctrine of Sovereign Equality)
2. The concept that when a foreign
sovereign enters the territorial jurisdiction
of another, it does not subject itself to the
jurisdiction of the other.
3. The rule of international law that a foreign
government may not be sued without its
consent so that it is useless to impose a
tax which could not be collected.

Exemption from Taxation of Government

Entities

Q: May the government tax itself?

A: Yes. One of the inherent limitations on the

power of taxation is recognition of tax
exemptions in favor of the government. This is
premised on the concept that with respect to the

government, exemption is the rule and taxation is

the exception in order to reduce administrative
costs. But since sovereignty is absolute and

taxationis an act of high sovereignty, the state if

so minded could tax itself, including its political
subdivisions. (Maceda v. Macaraeg, G.R. No.
88291, June 8, 1993)

Q: What are the rules on tax exemptions of

government agencies or instrumentalities?

A:
1. If the taxing authority is the National
Government:

GR: The government is exempt from tax.

Reason: Otherwise, we would be taking money

from one pocket and putting it in another. (Board
of Assessment Appeals of Laguna v. CTA, G.R. No. L18125, May 31, 1963)

XPN: When it chooses to tax itself. Nothing

prevents Congress from decreeing that even
instrumentalities or agencies of the
government performing government
functions may be subject to tax. Where it is
done precisely to fulfill a constitutional
mandate and national policy, no one can
doubt its wisdom. (MCIAA v. Marcos, G.R. No.
120082, Sept. 11, 1996)

Q: What is the rationale for government to tax

itself notwithstanding that it only incurs
administrative cost in the process?

A: Taxes, even those coming from the

government, are shared with the local
government units through the internal revenue
allocation. On the other hand, the increased
income arising from the tax exemption translates
to more revenues or dividends to the national
government. However, in case of dividends,
GOCCs are only required to remit 50% of their
profits. These revenues need not be shared with
the local government units.

2. If the taxing authority is the local

government unit, RA 7160 expressly
prohibits local government units from
levyin tax on the National Government,
its agencies and instrumentalities and
other LGUs.

Q: Will the mere fact that an entity is an agency

or instrumentality of the national government
make it exempt from local or national tax?

A: It depends:
1. Agencies performing governmental
functions are tax exempt unless
expressly taxed.
2. Agencies performing proprietary
functions are subject to tax unless
expressly exempted.

Q: The City of Iloilo filed an action for recovery

of sum of money against Philippine Ports
Authority (PPA), seeking to collect real property
taxes as well as business taxes, computed from
the last quarter of 1984 to the fourth quarter of
1988. It was alleged that the PPA is engaged in
the business of arrastre services, stevedoring
services, leasing of real estate, and a registered
owner of a warehouse which is used in the
operation of its business. From these, PPA was
alleged to be obligated to pay business taxes and
real property taxes.
The RTC of Iloilo held PPA liable for the payment
of real property taxes and for business taxes.
However, it held that the City of Iloilo may not
collect business taxes on PPA s arrastre and
stevedoring services, as these form part of PPA s
governmental functions.
1. Is the warehouse subject to local taxes?
2. Is the income from the lease of PPA s
property subject to tax?

A:

1. Yes. PPA s warehouse, which, although

located within the port is distinct from
the port itself. Considering the
warehouse s separable nature as an
improvement upon the port, and the fact
that it is not open for use by everyone
and freely accessible to the public, it is
not part of the port as stated in Article
420 of the Civil Code. The exemption of
public property from taxation does not
extend to improvements made thereon
by homesteaders or occupants at their
own expense.

2. The admission that PPA leases out to

private persons for convenience and not
necessarily as part of its governmental
function of administering port operations
is an admission that the act was a
corporate power. Any income or profit
generated by a corporation, even if
organized without any intention of
realizing profit in the conduct of its
activities, is subject to tax.

What matters is the established fact that

PPA leased out it s building to private
entities from which it regularly earned
substantial income. Thus, in the
absence of any proof of exemption
therefrom, PPA is declared liable for

the assessed business taxes. (Philippine

Ports Authority v. City of Iloilo, G.R. No.
109791, July 14, 2003)

Q: Are government educational institutions

exempt from taxes?

A:
GR: They shall not be taxed with respect to
their income.

XPN: The income of whatever kind and

character:
1. from any of their properties, real or
personal, or
2. from any of their activities conducted
for profit, regardless of the disposition
made of such income, shall be subject
to tax imposed (Sec. 30 [1], NIRC)

Q: What about the constitutional tax exemption

for non-stock non-profit educational
institutions?

A: All revenues and assets of non-stock, nonprofit educational institutions used actually,
directly, and exclusively for educational purposes
shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate
existence of such institutions, their assets shall be
disposed of in the manner provided by law.

The Constitution provides that as long as the

revenue is used ADE for educational purposes,
the revenue remain tax exempt. It appears that
Section 30 of the NIRC is inconsistent with the
Constitution. Constitution should still prevail. (See
page 26 for the illustrative case)

Note: Income derived from any public utility or from

the exercise of any essential governmental function
accruing to the government or to any political

subdivision thereof is exempt from income tax. (Sec.

32[B][7][b], NIRC)

CONSTITUTIONAL LIMITATIONS

Provisions Directly Affecting Taxation

Prohibition Against Imprisonment for NonPayment of Poll Tax.

Basis: No person shall be imprisoned for debt or

non-payment of a poll tax. (Sec.20, Art.III, 1987
Constitution)

Q: What is a poll tax?

A: It is a fixed amount upon all persons, or upon

all persons of a certain class, residents within a
specified territory, without regard to their
property or occupation. It is a tax imposed on a
per head basis. The present poll tax is the
community tax.

Q: May a person be imprisoned for nonpayment of tax?

A:
GR: A person may be imprisoned for nonpayment of internal revenue taxes, such as
income tax as well as other taxes that are not
poll taxes if expressly provided by law.
XPN: A person cannot be sent to prison for
failure to pay the community tax.

Uniformity and Equality of Taxation

Basis: The rule of taxation shall be uniform and

equitable. The Congress shall evolve a progressive
system of taxation. (Sec.28[1], Art. VI, 1987
Constitution)

Q: Explain the following concepts in taxation:

1. Uniformity
2. Equality
3. Equitability

A:
1. Uniformity
It means all taxable
articles or kinds of property of the
same class shall be taxed at the same
rate.

Note: Tax is uniform when it operates with the

same force and effect in every place where the
subject is found. Different articles may be taxed
at different amounts provided that the rate is
uniform on the same class everywhere, with all
people at all times.

2. Equality When the burden of the tax

falls equally and impartially upon all the
persons and property subject to it.

3. Equity When its burden falls on those

better able to pay.

Note: The Constitution requires uniformity, not

equality in taxation.

Q: Explain the requirement of uniformity as a

limitation in the imposition and/or collection of

taxes.

A: The criterion is met when the tax laws operate

equally and uniformly on all persons under
similar circumstances. All persons are treated in
the same manner, the conditions not being
different, both in privileges conferred and
liabilities imposed. Uniformity in taxation also
refers to geographical uniformity. Favoritism and
preference is not allowed. (1998 Bar Question)

Note: Singling out one particular class for taxation

purposes does not infringe the requirements of
uniformity.

Q: When is taxation progressive?

A: Taxation is progressive when tax rate

increases as the income of the taxpayer
increases.

Q: Why must taxation be progressive?

A: It is built on the principle of the taxpayer s

ability to pay and in implementation of the social
justice principle that the more affluent should
contribute more to the community s benefit. To
whom much is given, much is required.

Q: Does the Constitution prohibit regressive

taxes?

A: No, what the Constitution simply provides is

that Congress shall evolve a progressive system
of taxation.

Q: What does the Constitution mean when it

used the term evolve ?

A: The Constitution mandates to Congress not to

prescribe but to evolve a progressive tax system.

This is a mere directive upon Congress, not a

justiciable right or a legally enforceable one. We
cannot avoid regressive taxes but only minimize
them. (Tolentino et.al. v. Secretary of Finance,
G.R. No. 115455, Oct. 30, 1995)

Q: Is VAT regressive?

A: Yes. By its very nature, it is regressive

inasmuch as the VAT paid by the consumer or
business for every goods bought or services
enjoyed is the same regardless of income. (Ibid.)

Note: Not regressive as defined in such a manner

that the tax rate decreases as the amount subject to
taxation increases.

President s Power To Tax

Q: What is the authority of the President in

imposing tax?

A: The Congress may, by law, authorize the

President to fix within specified limits and subject
to such limitations and restrictions at it may
impose, tariff rates, import and export quotas,
tonnage and wharfage dues and other duties or
imposts within the framework of the national
development program of the Government. (Sec.
28 [2], Art. VI, 1987 Constitution)

Q: What are the requisites in order for the

President to validly impose tariff rates, import
and export quotas, tonnage and wharfage dues?

A:
a. Delegated by Congress through a law
b. Subject to Congressional limits and
restrictions

c. Within the framework of national

development program.

Exemption of Properties Actually, Directly.

and Exclusively Used For Religious,,
Charitable and.Educational Purposes

Q: To what exemption does the constitutional

exemption of all lands, buildings and
improvements actually, directly and exclusively
used for religious, charitable and educational
purposes refer to?

A: It pertains to exemption from real property

taxes only.

Q: What are the properties exempt under the

Constitution from the payment of property
taxes?

A:
1. Charitable institutions
2. Churches and parsonages or convents
appurtenant thereto, mosques
3. Non-profit cemeteries and
4. All lands, buildings and improvements
actually, directly and exclusively used
for religious, charitable or educational
purposes shall be exempt from
taxation. (Sec. 28(3), Art. VI, 1987
Constitution)

Note: To be entitled to the exemption, the

petitioner must prove that: it is any of the above
entities/institutions and that its real properties are

actually, directly and exclusively used for charitable

purposes.

Q: What is meant by the term

exclusive ?

A: It is defined as possessed and enjoyed to the

exclusion of others; debarred from participation
or enjoyment; and exclusively is defined, "in a
manner to exclude; as enjoying a privilege
exclusively.

Note: If real property is used for one or more

commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation.

Q: Is exclusivity synonymous with dominant use?

A: No. The words "dominant use" or "principal

use" cannot be substituted by the words "used
exclusively" without doing violence to the
Constitution and the law. Solely is synonymous
with exclusively.

Q: What is meant by actual, direct and exclusive

use of the property for religious, charitable and
educational purposes ?

A: It is the direct and immediate and actual

application of the property itself to the purposes
for which the charitable institution is organized. It
is not the use of the income from the real
property that is determinative of whether the
property is used for tax-exempt purposes.

Note: Under Section 22(3), Art VI of the 1935

Philippine Constitution:

(3) Cemeteries, churches, and parsonages or

convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall

be exempt from taxation.

Thus, in the case of The Roman Catholic Bishop of

Nueva Segovia v. The Provincial Board of Ilocos Norte
(December 31, 1927), the Court ruled:

The exemption in favor of the convent in the

payment of the land tax, include not only the land
actually occupied by the church, but also the
adjacent ground (which is being used for a vegetable
garden) destined to the ordinary incidental uses of
man, comes under the exemption. Moreover, in
regard to the lot which formerly was the cemetery,
while it is no longer used as such, neither is it used
for commercial purposes and, is now being used as a
lodging house by the people who participate in
religious festivities, which constitutes an incidental
use in religious functions, also comes within the
exemption.

In a much later case of Herrera v. QC-BAA

(September 30, 1961), the Court said:

The exemption in favor of property used exclusively

for charitable or educational purposes is not limited
to property indispensable therefore, but extends to
facilities which are incidental to and reasonably
necessary for the accomplishment of such purposes.

Following the previous ruling of the Supreme Court,

it was further held in the case of Abra Valley College
Inc. v. Aquino (June 15, 1988) that:

The exemption from taxation is the use of the

property for purposes mentioned in the
Constitution. It was stressed that the exemption
extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the
main purposes.

Therefore, in the aforementioned cases, which were

all decided in the light of the 1935 Constitution, the
Court clarified that the term used exclusively
considers incidental use, as being covered by the
exemption.

Note however, that in view of the substantial

amendments in the Constitution, Section 17(3), Art
VIII of the 1973 Philippine Constitution now read as
follows:

(3) Charitable institutions, churches, personages or

convents appurtenant thereto, mosques and nonprofit cemeteries, and all lands, buildings and
improvements actually, directly, and exclusively used
for religious or charitable purposes shall be exempt
from taxation.

Hence in the case of Province of Abra v. Hernando:

xxx Under the 1935 Constitution: "Cemeteries,

churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable, or
educational purposes shall be exempt from
taxation." The present Constitution added
"charitable institutions, mosques, and non-profit
cemeteries" and required that for the exemption of
"lands, buildings, and improvements," they should
not only be "exclusively" but also "actually" and
"directly" used for religious or charitable purposes.
The Constitution is worded differently. The change
should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have
sufficed were the words "actually" as well as
"directly" not added. There must be proof therefore
of the actual and direct use of the lands, buildings,
and improvements for religious or charitable
purposes to be exempt from taxation. xxx

This same provision is reproduced under Section

28(3), Article VI of the 1987 Philippine Constitution
(as implemented by Section 234(b) of Republic Act
No. 7160), and was applied in the recent case of
Lung Center of the Philippines v. City Assessor of
Quezon City. In resolving the issue on whether or not
the portions of the real property of Lung Center is
exempt from real property taxes, the Court
reexamined the intent of the constitutional provision
granting tax exemptions and made the following
ruling:

The tax exemption under this constitutional

provision covers property taxes only. As Chief Justice
Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: ". . . what is
exempted is not the institution itself . . .; those
exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively
used for religious, charitable or educational
purposes."

Under the 1935 Constitution, "all lands, buildings,

and improvements used exclusively for religious
and charitable purposes shall be exempt from
taxation." However, under the 1973 and the 1987
Constitutions, for "lands, buildings, and
improvements" of the charitable institution to be
considered exempt, the same should not only be
"exclusively" used for charitable purposes; it is
required that such property be used "actually" and
"directly" for such purposes.

Under the 1973 and 1987 Constitutions and Rep. Act

No. 7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. "Exclusive" is defined as
possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as
enjoying a privilege exclusively." If real property is
used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is
subject to taxation. The words "dominant use" or
"principal use" cannot be substituted for the words
"used exclusively" without doing violence to the
Constitutions and the law. Solely is synonymous with
exclusively.

THE PREVAILING RULE:

The term exclusively does not cover incidental use.
What is meant by actual, direct and exclusive use of
the property for charitable purposes is the direct and
immediate and actual application of the property
itself to the purposes for which the charitable
institution is organized. It is not the use of the
income from the real property that is determinative
of whether the property is used for tax-exempt
purposes.

Q: Give the rules on taxation of non-stock

corporations for charitable and religious
purposes.

A:
1. For purposes of income taxation

a. The income of non-stock

corporations operating exclusively
for charitable and religious
purposes, no part of which inures
to the benefit of any member,
organizer or officer or any specific
person, shall be exempt from tax.

However, the income of whatever

kind and nature from any of their
properties, real or personal or
from any of their activities for
profit regardless of the disposition
made of such income shall be
subject to tax.(Sec. 30 [E] and last
par., NIRC).

b. Donations received by religious,

charitable, and educational
institutions are considered as
income but not taxable income as
they are items of exclusion.

On the part of the donor, such

donations are deductible expense
provided that no part of the
income of which inures to the
benefit of any private stockholder
or individual in an amount not
exceeding 10% in case of
individual, and 5% in case of a
corporation, of the taxpayer s
taxable income derived from trade
or business or profession.
(Sec.34[H], NIRC).

2. For purposes of donor s and estate

taxation - donations in favor of
religious and charitable institutions are
generally not subject to tax provided,
however, that not more than 30% of
the said bequest, devise, or legacy or
transfer shall be used for
administration purposes (Secs. 87[D]
and 101, NIRC).

Q: In 1991, Imelda gave her parents a Christmas

gift of P100, 000.00 and a donation of P80,000 to
the parish church. She also donated a parcel of
land for the construction of a building to the PUP

Alumni Association a non-stock, non-profit

organization. Portions of the Building shall be
leased to generate income for the association.
1. Is the Christmas gift of P100, 000.00 to
Imelda s Parents subject to tax?
2. How about the donation to the parish
church?
3. How about the donation to the PUP alumni
association?

A:
1. The Christmas gift of P100,000 given by
Imelda to her parents is not taxable because
under the law (Section 99[A], NIRC), net gifts
not exceeding P100,000 are exempt.

2. The donation of P80,000.00 to the parish

church even is tax exempt provided that not
more than 30% of the said bequest shall be
used by such institutions for administration
purposes. (Section 87[D], NIRC)

3. The donation to the PUP alumni association

does not also qualify for exemption both
under the Constitution and the aforecited
law because it is not an educational or
research organization, corporation,
institution, foundation or trust. (1994 Bar
Question)

Q: The Constitution exempts from taxation

charitable institutions, churches, parsonages, or
convents appurtenant thereto, mosques, and
non-profit cemeteries and lands, buildings and
improvements actually, directly, and exclusively
used for religious, charitable or educational
purposes.

Mercy hospital is a 100 bed hospital organized

for charity patients. Can said hospital claim
exemption from taxation under the provision?

A: Yes. Mercy hospital can claim exemption from

taxation under the provision of the Constitution,
but only with respect to real property taxes
provided that such real properties are used
actually, directly, and exclusively for charitable
purposes. (1996 Bar Question)

Q: Article VI, Section 28(3) of the 1987

Philippine Constitution provides that charitable
institutions, churches and parsonages or
covenants appurtenant thereto, mosques, nonprofit cemeteries and all lands, buildings and
improvements actually, directly, and exclusively
used for religious, charitable or educational
purposes shall be exempt from taxation. To
what kind of taxes does this exemption apply?

A: This exemption applies only to property taxes.

What is exempted is not the institution itself but
the lands, buildings, and improvements actually,
directly and exclusively used for religious,
charitable, and educational purposes.
(Commissioner of Internal Revenue v. Court of
Appeals, et al. G.R. No. 124043, Oct. 14, 1998)
(2000 Bar Question)

Q: The Roman Catholic Church owns a 2 hectare

lot in a town in Tarlac province. The southern
side and middle part are occupied by the church
and a convent, the eastern side by the school
run by the church itself. The south eastern side
by some commercial establishments, while the
rest of the property, in particular, the
northwestern side, is idle or unoccupied. May
the church claim tax exemption on the entire
land?

A: No. The portion of the land occupied and used

by the church, convent and school run by the
church are exempt from real property taxes while
the portion of the land occupied by commercial
establishments and the portion, which is idle, are
subject to real property taxes. The usage of the
property and not the ownership is the
determining factor whether or not the property is
taxable. (Lung Center of the Philippines v. Quezon
City, G.R. No. 144104, June 29, 2004) (2005 Bar
Question)

Q: Abra Valley College, an educational

corporation and institution of higher learning
duly incorporated with the SEC failed to pay its
real estate taxes and penalties as a result
thereof a Notice of Seizure and Notice of Sale of
the lot and building was served against the
college. The school was assessed for taxes
because it was not exclusively used for
educational purposes. The Director of the Abra
Valley College, together with his family, occupies
the second floor of the school building as their
residence. The ground floor of said building was
leased to various commercial establishments.
Are the parts of the school building used as
residence and leased to commercial
establishments tax-exempt?

A: The answer must be qualified. The test for

exemption from taxation is the use of the
property for purposes mentioned in the
Constitution. However, the exemption extends to
facilities which are incidental to and reasonably
necessary for the accomplishment of the main
purposes. The use of the second floor of the main
building in the case at bar for residential purposes

of the Director and his family may find

justification under the concept of incidental use,
which is complimentary to the main or primary
purpose
educational.

While the use of the school building or lot for

commercial purposes is neither contemplated by
law, nor by jurisprudence therefore not tax
exempt. The lease of the ground floor to the
Northern Marketing Corporation cannot by any
stretch of imagination be considered incidental to
the purpose of education (Abra Valley College v.
Aquino, G.R. No. L-39086, June 15, 1988)

SUMMARY RULES ON EXEMPTION OF

PROPERTIES ACTUALLY, EXCLUSIVELY AND
DIRECTLY USED FOR RELIGIOUS, EDUCATIONAL
AND CHARITABLE PURPOSES

Coverage of this
Constitutional
Provision
Covers Real Property tax
only. The income of
whatever kind and nature
from any of their
properties, real or
personal or from any of
their activities for profit
regardless of the
disposition made of such
income shall be subject to
tax.
Requisite to avail of
this exemption
Property must be
actually, directly and
exclusively used by
religious, charitable and
educational institutions.
(Province of Abra v.
Hernando, G.R. No. L49336 Aug. 31, 1981)
Test for the grant of
this Exemption
Use of the property for
such purposes, not the
ownership thereof

Extent of this
Exemption
Extends to facilities which
are actual, incidental to or
reasonably necessary for
the accomplishment of
the main purposes.

Tax Exemptions Granted To Non-stock,

Non-Profit Educational Institutions

Q: What are the entities covered by this

provision?

A: Only non-stock, non-profit educational

institutions.

Q: What are the taxes covered?

A: All revenues and assets of non-stock, nonprofit educational institutions used actually,
directly, and exclusively for educational purposes
shall be exempt from taxes and duties. (Sec. 4[3],
Article XIV, 1987 Constitution)

Note: Incomes which are unrelated to school

operations are taxable.

Q: Under Article XIV, Section 4(3) of the 1987

Constitution, all revenues and assets of nonstock, non- profit educational institutions, used
actually, directly and exclusively for educational
purposes, are exempt from taxes and duties.
Are income derived from dormitories, canteens
and bookstores as well as interest income on
bank deposits and yields from deposit
substitutes automatically exempt from
taxation?

A: No. The interest income on bank deposits and

yields from deposit substitutes are not
automatically exempt from taxation. There must
be a showing that the incomes are used actually,
directly, and exclusively for educational
purposes.

The income derived from dormitories, canteens

and bookstores are not also automatically
exempt from taxation. There is still a
requirement for evidence to show actual, direct
and exclusive use for educational purposes. It is
to be noted that the 1987 Constitution does not
distinguish with respect to the source or origin of
the income. The distinction is with respect to the
use which should be actual, direct and exclusive
for educational purposes.

Consequently, the provision of Section 30 of the

NIRC of 1997, that a non-stock and non-profit
educational institution is exempt from taxation
only in respect to income received by them as
such could not affect the constitutional tax
exemption. Where the Constitution does not
distinguish with respect to source or origin, the
Tax Code should not make distinctions. (2000 Bar
Question)

Voting Requirement for Statutes Granting

Tax Exemptions

Q: What is the constitutional provision as

regards the grant of tax exemptions?

A: No law granting tax exemption shall be passed

without the concurrence of a majority vote of all

the Members of the Congress. (Sec.28[4], Art. VI,

1987 Constitution)

Basis: The inherent power of the State to impose

taxes carries with it the power to grant tax
exemptions.

Q: How are exemptions granted?

A: Exemptions may be created:

1. By the Constitution or
2. By statute, subject to limitations as the
Constitution may provide.

Q: What is the vote required for such grant of

tax exemption?

A: In granting tax exemptions, the absolute

majority vote of all the members of Congress is
required. It means at least 50% plus 1 of all the
members voting separately. (Sec.28[4], Art. VI,
1987 Constitution)

Q: Why separate vote for Senate and Congress?

A: Because the sheer number of Congressmen

would dilute the vote of the Senators.

Q: What is the vote required for withdrawal of

such grant of tax exemption?

A: A relative majority or plurality of votes is

sufficient, that is, majority of a quorum.

Prohibition on Use of Tax Levied for Special

Purpose

Q: How does the constitution treat all money

collected on any tax levied for a special
purpose?

A: It is treated as a special fund and paid out for

such purpose only. If the purpose for which a
special fund was created has been fulfilled or
abandoned, the balance, if any, shall be
transferred to the general funds of the
government. (Sec. 29[3], Art. VI, 1987
Constitution)

Veto Power Of The President

Q: What is the rule as regards the veto power of

the President?

A:
GR: The President may not veto a bill in part
and approve it in part.
XPN: The President shall have the power to
veto any particular item or items in an
appropriation, revenue or tariff bill but the
veto shall not affect the item or items which
he does not object. (Sec. 27(2), Art. VI, 1987
Constitution)

Non-Impairment Of Jurisdiction Of
The Supreme Court

Q: What does the Constitution provide with

respect to the jurisdiction of the Supreme
Court?

A: The Supreme Court can review judgments or

orders of lower courts in all cases involving:
a. The legality of any tax, impost, assessment,
or toll;
b. The legality of any penalty imposed in
relation thereto (Sec. 5[2][b], Art. VIII, 1987
Constitution)

Note: These jusridiction are concurrent with the

Regional Trial Courts; thus, the petition should
generally be filed with the RTC following the
hierarchy of courts. However, questions on tax laws
are usually filed direct with the Supreme Court as
these are imporessed with paramount public
interest. It is also provided under Sec. 30, Art VI of
the Constitution that no law shall be passed
increasing the appellate jurisdiction of the Supreme
Court without its advice and concurrence.

GR: The courts cannot inquire into the wisdom of

a taxing act.

XPN: There is an allegation of violation of

constitutional limitations or restrictions.

Municipal Taxation

Q: What justifies the delegation of legislative

taxing power to local governments?

A: Each local government unit shall have the

power to create its own sources of revenues and
to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.
(Article X, Section 5, 1987 Constitution)

Flexible Tariff Clause

Q: What is the

Flexible Tariff Clause ?

A: This clause provides the authority given to the

President to adjust tariff rates under Section 401
of the Tariff and Customs Code. (Garcia v.
Executive Secretary, G.R. No. 101273, July 3,
1992)

Note: This authority, however, is subject to

limitations and restrictions indicated within the law
itself.

*See President s Taxing Power on page 23

No Appropriation or Use of Public Money for

Religious Purposes

Q: Can public money be used for a religious

purpose?

A:
GR: No, public money or property cannot be
used for a religious purpose (Sec. 28[3], Art
VI, 1987 Constitution).

XPN: If a priest is assigned to the armed

forces, penal institutions, government
orphanages or leprosarium. (Sec.29[2], Art.VI,
1987 Constitution)

Origin of Revenue and Tariff Bills.

Q: What is required to originate in the House of

Representatives?

A: It is not the law but the revenue bill which

must originate exclusively in the House of
Representatives. The bill may undergo such
extensive changes that the result may be a
rewriting of the whole. The Senate may not only
concur with amendments but also propose
amendments. (Tolentino v. Secretary of Finance,
G.R. No. 115873, Aug. 25, 1994]

Q: Why must appropriation, revenue or tariff

bills originate from the Congress?

A: On the theory that, elected as they are from

the districts, the members of the House of
Representatives can be expected to be more
sensitive to the local needs and problems.

Q: Mounting budget deficit, revenue generation,

inadequate fiscal allocation for education,
increased emoluments for health workers, and
wider coverage for full VAT benefits are the
reasons why R.A No. 9337 was enacted. R.A. No.
9337 is a consolidation of three legislative bills
namely, HB Nos. 3555 and 3705, and SB No.
1950. Because of the conflicting provisions of the
proposed bills, the Senate agreed to the request
of the House of Representatives for a committee
conference. The Conference Committee on the
Disagreeing Provisions of House Bill
recommended the approval of its report, which
the Senate and the House of the Representatives
did.

1. Does R.A. No. 9337 violate Article VI,

Section 24 of the Constitution on exclusive
origination of revenue bills?
2. Does R.A. No. 9337 violate Article VI,
Section 26(2) of the Constitution on the
No-Amendment Rule ?

A:

1. No. It was HB Nos. 3555 and 3705 that

initiated the move for amending provisions
of the NIRC dealing mainly with the VAT.
Upon transmittal of said House bills to the
Senate, the Senate came out with SB No.
1950 proposing amendments not only to
NIRC provisions on the VAT but also
amendments to NIRC provisions on other
kinds of taxes.

Since there is no question that the revenue

bill exclusively originated in the House of
Representatives, the Senate was acting
within its Constitutional power to introduce
amendments to the House bill when it
included provisions in Senate Bill No. 1950
amending corporate income taxes,
percentage, excise and franchise taxes.
Verily, Article VI, Section 24 of the
Constitution does not contain any
prohibition or limitation on the extent of the
amendments that may be introduced by the
Senate to the House revenue bill. The Senate
can propose amendments and in fact, the
amendments made are germane to the
purpose of the house bills which is to raise
revenues for the government. The sections
introduced by the Senate are germane to the
subject matter and purposes of the house
bills, which is to supplement our country s
fiscal deficit, among others. Thus, the Senate
acted within its power to propose those
amendments.

2. No. The no-amendment rule refers only to

the procedure to be followed by each house

of Congress with regard to bills initiated in

each of said respective houses, before said
bill is transmitted to the other house for its
concurrence or amendment. Verily, to
construe said provision in a way as to
proscribe any further changes to a bill after
one house has voted on it would lead to
absurdity as this would mean that the other
house of Congress would be deprived of its
Constitution power to amend or introduce
changes to said bill. Thus, Art. VI, Sec. 26 (2)
of the Constitution cannot be taken to mean
that the introduction by the Bicameral
Conference Committee of amendments and
modifications to disagreeing provisions in
bills that have been acted upon by both
houses of Congress is prohibited. (Abakada
Guro v. Executive Secretary, G.R. No. 168056,
168207, 168461, 168463 and 168730, Sept.
1, 2005)

Provisions Indirectly Affecting Taxation

Due Process Clause

Q: What does due process in taxation require?

A:
Substantive Due Process

1. Tax must be for public purpose;

2. It must be imposed within territorial
jurisdiction;

Procedural Due Process

3. No arbitrariness or oppression either in

the assessment or collection.

Q: When is deprivation of life, liberty and

property by the government done in compliance
with due process?

A: If the act is done:

1. Under authority of a law that is valid or
the Constitution itself (substantive due
process); and
2. After compliance with fair and
reasonable methods of procedure
prescribed by law (procedural due
process).

Q: When may violation of due process be

invoked by the taxpayer?

A: The due process clause may be invoked where

a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
shown to amount to a confiscation of property.
(Reyes v. Almanzor, G.R. Nos. L-49839-46 April
26, 1991)

While it is true that the Philippines as a State is

not obliged to admit aliens within its territory,
once an alien is admitted, he cannot be deprived
of life without due process of law. This guarantee
includes the means of livelihood. The shelter of
protection under the due process and equal
protection clause is given to all persons, both
aliens and citizens. (Villegas v. Hiu Chiong Tsai
Pao Ho, G.R. No. L-29646, Nov. 10, 1978)

Q: Give illustrative cases of violations of the due

process clause.

A:
1. Tax amounting to confiscation of
property
2. Subject of confiscation is outside the
jurisdiction of the taxing authority
3. Law is imposed for a purpose other
than a public purpose

4. Law which is applied retroactively

imposes unjust and oppressive taxes
5. The law is in violation of inherent
limitations.

Equal Protection Clause

Basis: No person shall be deprived of life, liberty,

or property without due process of law, nor shall
any person be denied the equal protection of the
laws. (Sec.1, Art. III, 1987 Constitution)

Q: What is meant by equal protection of the

law?

A: It means that all persons subjected to such

legislation shall be treated alike, under like
circumstances and conditions, both in the
privileges conferred and in theliabilities imposed.
(1 Cooley 824-825; Sison Jr. v. Ancheta, G.R. No.
59431, July 25, 1984)

The power to select subjects of taxation and

apportion the public burden among them
includes the power to make classifications. The
inequalities which result in the singling out of
one particular class for taxation or exemption
infringe no Constitutional limitation (Lutz v.
Araneta, G.R. No. L-7859, Dec. 22, 1955)

Q: What are the requisites for a valid

classification?

A: PEGS
1. Apply both to Present and future
conditions;
2. Apply Equally to all members of the
same class.
3. Must be Germane to the purposes of
the law;
4. Must be based on Substantial
distinction.

Q: Is Revenue Memorandum Circular No. 47-91

classifying copra as an agricultural non-food
product discriminatory and violative of the
equal protection clause?

A: No. It is not violative and not discriminatory

because there is a material or substantial
difference between coconut farmers and copra
producers, on one hand, and copra traders and
dealers, on the other. The former produce and
sell copra, the latter merely sells copra. The
Constitution does not forbid the differential
treatment of persons, so long as there is
reasonable basis for classifying them differently.
(Misamis Oriental Association of Coco Traders
Inc. v. Secretary of Finance, G.R. No. 108524, Nov.
10, 1994)

Q: What is the Principle of Equality?

A: It admits of classification or distinctions as

long as they are based upon real and substantial
differences between the persons, property, or
privileges and those not taxed must bear some
reasonable relation to the object or purpose of
legislation or to some permissible government
policy or legitimate end of the government.

Q: RC is a law abiding citizen who pays his real

estate taxes promptly. Due to a series of
typhoons and adverse economic conditions, an
ordinance is passed by MM City granting a 50%
discount for payment of unpaid real estate taxes
for the preceding year and the condonation of
all penalties on fines resulting from the late

payment. Arguing that the ordinance rewards

delinquent taxpayers and discriminates against
prompt ones, RC demands that he be refunded
an amount equivalent to of the real taxes he
paid. The municipal attorney rendered an
opinion that RC cannot be reimbursed because
the ordinance did not provide for such
reimbursements. RC files suit to declare the
ordinance void on the ground that it is a class
legislation. Will a suit prosper?

A: The suit will not prosper. The remission or

condonation of taxes due and payable to the
exclusion of taxes already collected does not
constitute unfair discrimination. Each set of taxes
is a class by itself and the law would be open to
attack as class legislation only if all taxpayers
belonging to one class were not treated alike.
(Juan Luna Subdivision, Inc., v. Sarmiento, G.R. L3538, May 28, 1952) (2004 Bar Question)

Q: An E.O. was issued pursuant to law, granting

tax and duty incentives only to businesses and
residents within the secured area of the Subic
Economic Special Zone, and denying said
incentives to those who live within the zone but
outside such secured area: Is the
Constitutional right to equal protection of the
law violated by the Executive Order?

A: No. There are substantial differences between

big investors being enticed to the secured area
and the business operators outside that are in
accord with the equal protection clause that does
not require territorial uniformity of laws. The
classification applies equally to all the resident
individuals and businesses within the secured
area the residents, being in like circumstances to
contributing directly to the achievement of the
end purpose of the law, are not categorized
further. Instead, they are similarly treated both in
privileges granted and obligation required. (Tiu,
et al. v. Court of Appeals, G.R. No. 127410, Jan.
20, 1999) (2000 Bar Question)

Q: The City Council of Ormoc enacted Ordinance

No. 4, Series of 1964 taxing the production and
exportation of only centrifugal sugar. At the
time of the enactment, plaintiff Ormoc Sugar
Co., was the only sugar central in Ormoc.
Petitioner alleged that said Ordinance is
unconstitutional for being violative of the equal

protection clause. Is the Ordinance valid?

A: No, equal protection clause applies only to

persons or things identically situated and does
not bar a reasonable classification of the subject
of legislation. The classification, to be reasonable,
should be in terms applicable to future conditions
as well. The taxing ordinance should not be
singular and exclusive as to exclude any
substantially established sugar central, of the
same class as Ormoc Sugar Co., from the coverage
of the tax. (Ormoc Sugar Industry v. City Treasurer
of Ormoc City, G.R. No. L-23794, Feb. 17, 1968)

Freedom Of Religion

Q: Is the real property tax exemption of

religious organizations violative of the nonestablishment clause?

A: No. Neither the purpose nor the effect of the

exemption is the advancement or the inhibition
of religion; and it constitutes neither personal
sponsorship of, nor hostility to religion. (Walz v.
Tax Commission, 397 US 664)

Note:
Public money or property cannot be used for a
religious purpose (Sec. 28[3], Art VI, 1987
Constitution). Except, if a priest is assigned to the
armed forces, penal institutions, government
orphanages or leprosarium. (Sec.29[2], Art.VI, 1987
Constitution)

Q: Is the imposition of fixed license fee a prior

restraint on the freedom of the press and
religious freedom?

A: Yes. As a license fee is fixed in the amount and

unrelated to the receipts of the taxpayer, the
license fee, when applied to a religious sect, is
actually being imposed as a condition for the
exercise of the sect s right under the
Constitution. (Tolentino v. Secretary of Finance,
G.R. No. 115873, Aug. 25, 1994)

Q: Is VAT registration restrictive of religious and

press freedom?

A: No. The VAT registration fee although fixed in

amount is not imposed for the exercise of a
privilege but only for the purpose of defraying
part of the cost of registration. (Ibid.)

Non-Impairment Clause

Q: What are the instances when there is

impairment of the obligations of contract?

A: When the law changes the terms of the

contract by:
1. Making new conditions; or
2. Changing conditions in the contract; or
3. Dispenses with the conditions
expressed therein.

Q: What is the rationale for the non-impairment

clause in relation to contractual tax exemption?

A: When the State grants an exemption on the

basis of a contract, consideration is presumed to
be paid to the State and the public is supposed to
receive the whole equivalent therefore.

Note: This applies only where one party is the

government and the other party, a private person.

Q: What are the rules regarding non-impairment

of obligation and contract with respect to the
grant of tax exemptions?

A:
1. If the grant of the exemption is merely a
spontaneous concession by the
legislature, such exemption may be
revoked. (unilaterally granted by law)
2. If it is without payment of any
consideration or the assumption of any
new burden by the grantee, it is a mere
gratuity. (franchise)
3. However, if the tax exemption
constitutes a binding contract and for
valuable consideration, the government

cannot unilaterally revoke the tax

exemption. (bilaterally agreed upon)

Q: Does RA 7716 (E-VAT Law) violate the nonimpairment clause?

A: No. Even if such taxation may affect particular

contracts, as it may increase the debt of one
person and lessen the security of another, or may
impose additional burdens upon one class and
release the burdens of another, still the tax must
be paid unless prohibited by the Constitution, nor
can it be said that it impairs the obligations of any
existing contract in its true and legal sense.

Contracts must be understood as having been

made in reference to the possible exercise of the
rightful authority of the government and no
obligation of contract can extend to defeat the
authority. (Tolentino v. Secretary of Finance, ibid.)

Q: X Corporation was the recipient in 1990 of

two tax exemptions both from Congress, one
law exempting the company s bond issues from
taxes and the other exempting the company
from taxes in the operation of its public utilities.
The two laws extending the tax exemptions
were revoked by Congress before their expiry
dates. Were the revocations Constitutional?

A: Yes. The exempting statutes are both granted

unilaterally by Congress in the exercise of taxing
powers. Since taxation is the rule and tax
exemption, the exception, any tax exemptions
unilaterally granted can be withdrawn at the

pleasure of the taxing authority without violating

the Constitution. (Mactan Cebu International
Airport Authority v. Marcos, G.R. No. 120082,
Sept. 11, 1996) (1997 Bar Question)

Q: A law was passed granting tax exemptions to

certain industries and investments for a period
of 5 years but 3 years later, the law was
repealed. With the repeal, the exemptions were
considered revoked by the BIR, which assessed
the investing companies for unpaid taxes
effective on the date of the repeal of the law.

NPC and KTR companies questioned the

assessments on the ground that, having made
their investments in full reliance with the period
of exemption granted by the law, its repeal
violated their Constitutional right against the
impairment of the obligations and contracts. Is
the contention of the company tenable or not?

A: The contention is not tenable. The exemption

granted is in the nature of a unilateral exemption.
Since the exemption given is spontaneous on the
part of the legislature and no service or duty or
other remunerative conditions have been
imposed on the taxpayer receiving the
exemption, it may be revoked by will by the
legislature (Christ Church v. Philadelphia, 24 How
300 [1860]). What constitutes an impairment of
the obligation of contracts is the revocation of an
exemption which is founded on a valuable
consideration because it takes the form and
essence of a contract. (Casanovas v. Hord, 8 Phil.
12 ,[1907]; Manila Railroad Co. v. Insular Collector
of Customs [1915]) (2004 Bar Question)

Freedom Of The Press

Q: RA 7716 was enacted to widen the tax base of

the existing VAT system and enhance its
administration by amending the NIRC.

The PPI questions the law insofar as it has

withdrawn the exemption previously granted to

the press under Section 103 (f) the NIRC.

Although the exemption was subsequently
restored by administrative regulation with
respect to the circulation of income of
newspapers, PPI presses its claim because of the
possibility that the exemption may still be
removed by mere revocation of the regulation of
the Secretary of Finance. Is RA 7716
unconstitutional for it violates the freedom of
the press under Sec.4, Art.III, 1987 Constituion?

A: No. Even with due recognition of its high estate

and its importance in a democratic society,
however the press is not immune from general
regulation by the State. It has been held that the
publisher of a newspaper has no immunity from
the application of general laws. He has no special
privilege to invade the rights and liberty of others.
He must answer for libel. He may be punished for
contempt of court. Like others, he must pay
equitable and nondiscriminatory taxes on his
business. (Tolentino v. Secretary of Finance, G.R.
No. 115873, Aug. 25, 1994)

STAGES/ASPECTS OF TAXATION

Q: What are the stages/aspects of a system of

taxation?

A: The stages/aspects of a system of taxation are

as follows: [LAcPR]
1. Tax Legislation (Levy or Imposition)
This refers to the enactment of a law by
Congress authorizing the imposition of
tax. It further contemplates the
determination of the subject of
taxation, purpose for which the tax shall
be levied, fixing the rate of taxation and
the rules of taxation in general.

2. Tax Administration (Assessment and

Collection) This is the act of
administration and implementation of
the tax law by executive through its
administrative agencies.

The act of assessing and collecting taxes

is administrative in character, and
therefore can be delegated.
(Dimaampao, Tax Principles and
Remedies 3rd Ed. 2008, p.21)

3. Payment
The act of compliance by the
taxpayer, including such options,
schemes or remedies as may be legally
available.

4. Refund
The recovery of any tax
alleged to have been erroneously or
illegally assessed or collected, or of any
penalty claimed to have been collected
without authority, or of any sum alleged
to have been excessively, or in any
manner wrongfully collected.

Note: If what is delegated is tax legislation, the

delegation is invalid. If what is delegated is tax
administration, the delegation is valid. (Then there is
no delegation to speak of, because tax

administration pertains to the executive or

administrative agencies)

Q: What are the kinds of rules relative to the

imposition of tax?

A:
1. Legislative rule
subordinate legislation
by the Secretary of Finance.
2. Interpretative rule issuance of
guidelines and procedures to enhance
the administration of tax laws by the
Secretary of Finance.

Q: Taxes are assessed for the purpose of

generating revenue to be used for public needs.
Taxation itself is the power by which the State
raises revenue to defray the expenses of
government. A jurist said that a tax is what we
pay for civilization, in our jurisdiction, which of
the following statements may be erroneous:
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and
contributions.
3. Taxes are imposed on persons and property
within the territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of
the government.
5. Taxes are assessed according to a reasonable
rule of apportionment.

A: (4) Taxes are levied by the executive branch of

government.

This statement is erroneous because levy refers

to the act of imposition by the legislature which is
done through the enactment of a tax law. Levy is
an exercise of the power to tax which is
exclusively legislative in nature and character.
Clearly, taxes are not levied by the executive
branch of government. (NPC v. Albay, G.R. No.
87479, June 4, 1990) (2004 Bar Question)

Q: Can assessment and collection be delegated?

A: Yes, provided that:

1. The tax law must designate which
agency will collect; and
2. The circulars or regulations must be in
accordance with the tax measures
imposed by Congress.

Note: Assessment and collection may be delegated

but not levy. Levy or the imposition of tax cannot be
delegated since it is exclusively conferred with the
Congress.

Q: Is the approval of the court, sitting as probate

or estate settlement court, required in the
enforcement of the estate tax?

A: No. The approval of the court, sitting in

probate, is not a mandatory requirement in the
collection of estate tax. On the contrary, under
Section 94 of the NIRC, it is the probate or
settlement court which is forbidden to authorize
the executor or judicial administrator of the
decedent s estate, to deliver any distributive
share to any party interested in the estate, unless
a certification from the Commissioner of the
Internal Revenue that the estate tax has been
paid is shown. (Marcos II v. Court of Appeals, G.R.
No.120880, June 5, 1997) (2005 Bar Question)

*Further discussed under Remedies of the

Taxpayer.

TAXES

CONCEPT AND NATURE

Q: Define taxes.

A: These are enforced proportional contributions

from persons and properties, levied by the State
by virtue of its sovereignty for the support of the
government and for all its public needs. (1Cooley
62).

Q: What are the characteristics of taxes?

A: SLEP4
1. It is levied by the State which has
jurisdiction over the person or property
2. It is levied by the State through its Lawmaking body
3. It is an Enforced contribution not
dependent on the will of the person
taxed.
4. It is generally Payable in money
5. It is Proportionate in character
6. It is levied on Persons and property
7. It is levied for a Public purpose.

Q: What are the requisites of a valid tax?

A:
1. It should be for a public purpose;
2. It should be uniform;
3. That either the person or property
being taxed be within the jurisdiction of
the taxing authority; and

4. The tax must not impinge on the

inherent and constitutional limitations
on the power of taxation.

TAX AS DISTINGUISHED FROM OTHER

CHARGES AND FEES

TAX
CUSTOMS DUTY
Coverage
More comprehensive
than customs duty
Only a kind of tax
therefore limited
coverage
Object
Persons, property, etc.
Goods imported or
exported

TAX
TOLL
Definition
An enforced
proportional
contribution from
persons and property
for public purpose/s.
A consideration paid for
the use of a road,
bridge or the like, of a
public nature.
Basis

Demand of sovereignty
Demand of
proprietorship
Amount
Generally the amount is
unlimited

Amount is limited to
the cost and
maintenance of public
improvement
Purpose
For the support of the
government
For the use of another s
property
Authority
May be imposed by the
State only
May be imposed by
private individuals or
entities

TAX
LICENSE FEE
Purpose
Imposed to raise revenue
For regulation and control
Basis
Collected under the
power of taxation
Collected under police
power
Amount
Generally, amount is
unlimited

Limited to the necessary

expenses of regulation
and control
Subject
Imposed on persons,
property, rights or
transaction
Imposed on the exercise
of a right or privilege
Effect of Non-Payment
Non-payment does not
make the business illegal
Non-payment makes the
business illegal
Time of Payment
Normally paid after the
start of business
Normally paid before the
commencement of the
business

TAX
SPECIAL ASSESSMENT
Nature
An enforced
proportional
contribution from
persons and property
for public purpose/s.
An enforced
proportional
contribution from
owners of lands
especially those who
are peculiarly benefited
by public improvements
Subject
Imposed on persons,

property rights or
transactions
Levied only on land

Person Liable
A personal liability of
the taxpayer
Not a personal liability
of the person assessed
Purpose
For the support of the
government
Contribution to the cost
of public improvement
Scope
Regular exaction
Exceptional as to time
and locality

TAX
DEBT
Basis
Obligation created by
law
Obligation based on
contract, express or
implied
Assignability
Not assignable
Assignable
Mode of Payment
Payable in money or in
kind

Payable in kind or in
money
Set-off
Not subject to set-off
Subject to set-off
Effect of non-payment
May result to
imprisonment

No imprisonment (except
when debt arises from
crime)
Interest
Bears interest only if
delinquent
Interest depends upon
the written stipulation of
the parties
Prescription
Governed by the special
prescriptive periods
provided for in the NIRC
Governed by the
ordinary periods of
prescription

TAX
PENALTY
Definition
An enforced
proportional
contribution from
persons and property for
public purpose/s.

Sanction imposed as a
punishment for a
violation of the law or
acts deemed injurious;
violation of tax laws
may give rise to
imposition of penalty.
Purpose
To raise revenue
To regulate conduct

Authority
Maybe imposed by the
State only
Maybe imposed by
private entities

CLASSIFICATION OF TAXES

Q: What are the classifications of taxes? Give

examples.

A.
1. As to object / subject matter
a. Personal/Poll or Capitation tax
A
fixed amount imposed upon all
persons, or upon all persons of a
certain class, residents within a
specified territory, without regard
to their property or occupation.
E.g. Community tax
b. Property tax
Tax imposed on
property, whether real or personal,
in proportion either to its value, or
in accordance with some other
reasonable method of
apportionment.
E.g. Real Property tax
c. Excise / Privilege tax
a charge
upon the performance of an act,
the enjoyment of a privilege, or the
engaging in an occupation. An
excise tax is a tax that does not fall
as personal or property.
E.g. Income tax, Estate tax,
Donor s tax, VAT

Note: This is different from the excise tax

under the NIRC which is a business tax
imposed on items such as cigars,
cigarettes, wines, liquors, frameworks,
mineral products, etc.
2. As to who bears the burden:
a. Direct
one that is demanded
from the person who also
shoulders the burden of tax.

E.g. Income tax, Estate tax

and Donor s tax
b. Indirect
one which is shifted by
the taxpayer to someone else.

E.g. VAT and Other

percentage taxes

3. As to determination
rates:
a. Specific tax of a
imposed by the head or
or by some standard of
measurement.

of the amount / tax

fixed amount
number,
weight or

E.g. Excise tax on cigar,

cigarettes and liquors
b. Ad valorem tax based on the
value of the property with respect
to which the tax is assessed. It
requires the intervention of
assessors or appraisers to estimate
the value of such property before
the amount due can be
determined.
E.g. VAT, Income tax, Donor s
tax and Estate tax

4. As to purpose:
a. General/Fiscal or Revenue tax
imposed solely for the general
purpose of the government.

E.g. Income tax and Donor s

tax
b. Special / Regulatory or Sumptuary
tax levied for specific purpose,
i.e. to achieve some social or
economic ends
E.g. Tariff and certain duties
on imports

5. As to scope/ or authority to impose:

a. National tax
Tax levied by the
National Government.
E.g. Income tax, Estate tax,
Donor s tax, Value added tax,
Other Percentage taxes and
Documentary Stamp taxes
b. Local or Municipal
a local government.

A tax levied by

E.g. Real Estate tax and

Community tax

6. As to proportionality or graduation:
a. Progressive A tax rate which
increases as the tax base or
bracket increases.
E.g. Income tax, Estate tax
and Donor s tax
b. Regressive
The tax rate
decreases as the tax base or
bracket increases.
c. Proportional A tax of a fixed
percentage of amount of the base
(value of the property, or amount
of gross receipts etc.)
E.g. VAT and Other
Percentage taxes

7. As to Tax Base:

a. Gross Taxation
any deductions.

does not admit of

b. Net Taxation admits of

deductions in arriving at the
taxable base.

NATIONAL INTERNAL REVENUE CODE

OF 1997 AS AMENDED

INCOME TAXATION

Q: What are the basic features of the present

income tax system?

A: Our present income tax system has the

following basic features:

1. It has adopted a comprehensive tax

situs by using the nationality, residence,
and source rules.

2. The individual income tax system is

mainly progressive in nature in that it
provides graduated rates of income tax.

Note: Corporations in general are taxed at

a flat rate of 30% of net income.

3. It has retained a more schedular than

global features with respect to
individual taxpayers but has maintained
a more global treatment on
corporations.

4. Direct Tax
tax burden is borne by the
income tax receipient upon whom the
tax is imposed. (1996 Bar Question)

Q: Distinguish global system from schedular

system of income taxation.

A: Under a scheduler system, the various types or

items of income (compensation, business or
professional income) are classified accordingly
and are accorded different tax treatments, in
accordance with schedules characterized by
graduated tax rates. Since these types of income
are treated separately, the allowable deductions
shall likewise vary for each type of income.

Under the global system, all income received by

the taxpayer are grouped together, without any
distinction as to the type or nature of the income,
and after deducting therefrom expenses and
other allowable deductions, are subjected to tax
at a fixed rate. (1994 Bar Question)

Q: What is a semi-schedular or semi-global tax

system?

A: A system where the compensation, business or

professional income, capital gain and passive
income not subject to final tax, and other income
are added together to arrive at the gross income,
and after deducting the sum of allowable
deductions from business or professional income,
capital gain and passive income not subject to
final tax, and other income, in the case of
corporations, as well as personal and additional
exemptions, in the case of individual taxpayers,
the taxable income is subjected to one set of
graduated tax rates; method of taxation under
the law.

Q: What system is employed in case of individual

income taxation?

A: The schedular system is followed. Under Sec.

24 to 26 of the NIRC, the income of an individual
taxpayer that is subject to tax may be classified
into compensation income, business income,
professional income, passive income, capital
income derived from the sale of shares of stock,
or capital gain derived from the sale of real
property. Therefore, different income
classification would subject it to different tax
treatment with different tax rates.

Q: What system is adopted in corporate income

taxation?

A: Global system of taxation. Under Sec. 27 and

28 of the NIRC, the rules are uniform as far as
domestic corporations are concerned subject to
certain exceptions. In case of resident and non
resident foreign corporations the rules applied
are also uniform.

Basis of Taxability of Income

Q: What are the criteria in imposing Philippine

income tax?

1. Citizenship Principle
A citizen taxpayer
is subject to income tax:
a. On his worldwide income, if he
resides in the Philippines.
b. Only on his income from sources
within the Philippines, if he
qualifies as non-resident citizen.

2. Residence Principle a resident alien is

liable to pay income tax on his income
from sources within the Philippines but
exempt from tax on his income from
sources outside the Philippines.

3. Source Principle
a non-resident alien is
subject to Philippine income tax
because he derives income from such
sources within the Philippines such as
dividend, interest, rent or royalty.

Q: Give the general principles of income taxation

in the Philippines under Sec. 23 of the NIRC.

A: Except when otherwise provided in the NIRC:

1. A resident citizen is taxable on all
income derived from sources within and
without the Philippines;
2. A non-resident citizen is taxable only on
income derived from sources within the
Philippines;
3. A citizen of the Philippines who is
working and deriving income from
abroad as an OFW is taxable only on
income derived from sources within the
Philippines: Provided, That a seaman
who is a citizen of the Philippines and
who receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged
exclusively in international trade shall
be treated as an OFW;
4. An alien individual, whether a resident
or not of the Philippines, is taxable only
on income derived from sources within
the Philippines;
5. A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
6. A foreign corporation, whether engaged
or not in trade or business in the
Philippines, is taxable only on income
derived from sources within the
Philippines.

Types of Philippine Income Tax

Q: What are the types of income tax?

A:
1. Presumptive Income Tax
A scale of
income taxes is imposed in relation to a
group of person s actual expenditure
and the presumed income.
2. Composite Tax A tax consisting of a
series of separate quasi-personal taxes,
assessed on the particular source of

income with a superimposed personal

tax on the income as a whole.
3. Unitary Income Tax
Incomes are
arranged according to source. The
separate items are added together and
the rate applied to the resulting total
income.

Q: What are the different types of income taxes

under the NIRC?

A: The types of Income Tax under the NIRC

includes:
1. Personal Income Tax on individuals
2. Regular corporate income tax on
corporations
3. Minimum corporate income tax on
corporations
4. Capital gains tax on sale of shares of
stocks of a domestic corporation
outside an exchange by a person who is
not a dealer in securities and capital
gains tax on sale of real property
classified as a capital asset by a person
who is not a real estate dealer or
developer
5. Tax on passive investment income, such
as interest, dividend, and royalty;
6. Fringe benefit tax
7. Branch profit remittance tax on
Philippine branches of foreign
corporations
8. Tax on improperly accumulated
earnings tax of corporations
9. Final withholding income tax on certain
income from sources within the
Philippines payable to resident (i.e.
interests on bank deposits) or non
resident persons (i.e. interests on
foreign loans or management fees paid
to non resident foreign corporation), or
to certain special persons (i.e. OBU,
ROHQ, PEZA or SMBA-registered
enterprises.)

Q: What are the classifications of sources of

income?

A:
1. Income from
Philippines.
2. Income from
Philippines.
3. Income from
partly without
NIRC)

sources within the

sources without the
sources partly within and
the Philippines. (Sec. 42,

Q: What are the factors in determining the

source of income?
.
A:
1. Interests
source of income which rests
on the residence of the debtor
2. Dividends residence of the
corporation declaring the dividends

3. Services
place of performance of the
service
4. Rentals and Royalties location of
property or interest in such property
5. Sale of Real Property location of the
property
6. Sale of Personal Property
country in
which it is sold

Note: The sale of shares of stock in a domestic

corporation shall be treated as derived entirely from
sources within the Philippines regardless of where
said shares are sold.

Taxable Period

Q: What are the two periods that may be used

by the taxpayer in the computation of taxable
income?

A:
1. Fiscal year period
accounting period
of 12 months ending on the last day of
any month other than Dec.
2. Calendar year period accounting
period from Jan. 1 to Dec. 31.

Q: Who can adopt fiscal year period or calendar

year?

A: Corporate taxpayers have the option whether

to adopt fiscal year or calendar year period. On
the other hand, an individual taxpayer can only
adopt calendar year period.

Q: Can there be a taxable period of less than 12

months?

A: A taxpayer may have a taxable period of less

than 12 months where: DiNe-ChaD
1. Taxpayer Dies
2. Corporation is Newly organized
3. Corporation Changes its accounting
period
4. Corporation is Dissolved

Q: What is the treatment in case a corporation

changes its accounting period?

A: If a corporate taxpayer, changes its accounting

period from fiscal year to calendar year, from
calendar year to fiscal year, or from one fiscal
year to another, the net income shall, with the
approval of the CIR, be computed on the basis of
such new accounting period, subject to the
provisions of Sec. 47. (Sec. 46, NIRC)

Note: A separate adjustment or final return shall be

made for the period not covered by the old
accounting period and the new accounting period.
(Sec. 47, NIRC)

Kinds of Taxpayer

Q: What are the classes of taxpayers?

A: ICP-GET-Co
1. Individuals
a. Citizen
i. Resident citizen (RC)
ii. Non-resident citizen (NRC)
b. Aliens
i. Resident Alien (RA)
ii. Non resident aliens (NRA)
. NRA-ETB (engaged in
trade or business)
. NRA-NETB (not engaged
in trade or business)

c. Special Class Individual Employee

2. Corporations
a. Domestic
b. Foreign
i. Resident foreign corporation
(RFC)
ii. Non-resident foreign
Corporation (NRFC)

3. Partnerships (considered as
corporations under the NIRC)
4. General Professional Partnerships
5. Estates
6. Trusts
7. Co
Ownerships ( either treated as a
continuation of the separate interest of
the different owners or as unregistered
partnership)

Q: What is the importance of knowing the

classification of taxpayers?

A: In order to determine the applicable: GREED

1.
2.
3.
4.
5.

Gross income base;

Income tax Rates
Exclusions from gross income
Exemptions; and
Deductions.

Individual Taxpayers

Q: What are the classifications of individual

taxpayers?

A:
1. Resident Citizen (RC)
Citizens of the
Philippines who are residing therein.

2. Non-resident Citizen (NRC)

a. A citizen of the Philippines who
establishes to the satisfaction of
the CIR the fact of his physical
presence abroad with a definite
intention to reside therein;
b. A citizen of the Philippines who
leaves the Philippines during a
taxable year to reside abroad,
either as an immigrant or for
employment on a permanent
basis;
c. A citizen of the Philippines who
works and derives income from
abroad and whose employment
thereat requires him to be
physically present abroad most of
the time during the taxable year;
d. A citizen who has been previously
considered as NRC and who arrives
in the Philippines at any time
during the taxable year in which he
arrives in the Philippines with
respect to his income derived from
sources abroad until the date of his
arrival in the Philippines;
e. The taxpayer shall submit proof to
the CIR to show his intention of
leaving the Philippines to reside
permanently abroad or to return
to and reside in the Philippines as
the case may be for purposes of
this section. (Sec. 22 [E], NIRC)

3. Resident Alien (RA) An individual

whose residence is within the
Philippines but who is not a citizen
thereof. (Sec. 22 [F], NIRC)

Note: He is one who is actually present in

the Philippines and not a mere transient
or sojourner. Residence does not mean
mere physical presence, an alien is
considered a resident or non-resident

depending on his intention with regard to

the length and nature of his stay.

4. Non-resident Alien (NRA)

an individual
whose residence is not within the
Philippines and who is not a citizen
thereof. (Sec. 22 [G], NIRC)

Q: What is the test to determine whether a

citizen is a resident of the Philippines?

A: Jurisprudence have stated that residence is a

permanent place to which a person whenever
absent for business or pleasure has the intention
to return to.

Q: Can a citizen be considered a RC and a NRC

during a taxable year?

A: Yes. i.e., if a citizen departs for Japan in July 1,

2009, from Jan. to June 2009 he is considered as
RC but upon his arrival in Japan sometime in July
to Dec. he shall be taxed as a NRC.

Q: What is the Doctrine of Personal Jurisdiction

for income tax purposes?

A: The law of the country which you are a citizen

of follows you for the protection of the
government follows you.

Q: What are the classifications of NRA?

A:
1. Non-resident alien engaged in trade or
business (NRA ETB) An alien who
stays in the Philippines for more than
180 days. (Sec. 25 [A], NIRC)

2. Non-resident alien not engaged in trade

or business (NRA-NETB)
An alien who
stays in the Philippines for 180 days or
less. (Sec. 25 [B], NIRC)

Note: It is the length of stay in the Philippines

that determines whether or not he is engaged
in trade or business. The number of transaction
he entered into is immaterial.

Q: What is the significance of classifying an alien

as a resident or a non-resident?

A:

RA
NRA
ETB
NETB
Tax
treatment
5 32%
schedular
rate
5 32%
schedular
rate
25% final
tax
Personal and
additional
exemption
Entitled
Entitled
subject to
the rule on
reciporcity
Not

entittled

Note: Except in the case of NRA-ETB, they can claim

such exemption subject to the rule on reciprocity
that he must prove that his country grants
exemption to Filipinos engage in trade or business in
their country.

Q: Are individual taxpayers deriving income from

trade or business entitled to deductions?

A: Except for NRA-NETB whose tax base is his

gross income (therefore deductions are not
allowed) an individual taxpayer can claim
deductions because their tax base is taxable
income.

Q: A regulation was passed by the BIR exempting

or excluding income of a RC derived from
sources outside the Philippines. Is it valid?

A: No, such regulation is contrary to law in

particular the NIRC. In order for a regulation to be
valid such must be in harmony with law.

Q: Assuming the BIR changed the tax base of a

RC from taxable income to gross income, is that
valid?

A: No, the BIR cannot go beyond the sources of

the law.

Q: Is the income of an overseas worker derived

abroad taxable?

A: No, it is no longer taxable applying the rule

that in case of NRC, only income derived from
sources within the Philippines is taxable.

SPECIAL CLASSES OF.INDIVIDUAL EMPLOYEES

Q: Who are the special individual employees?

A:
1. Minimum Wage Earner
2. Individuals, whether Filipino or alien
employed by:

a. Regional or area headquarters

(RAHQ) and regional operating
headquarters (ROHQ) of
multinational companies in the
Philippines (Sec. 25[C], NIRC);
b. Offshore banking units established
in the Philippines (Sec. 25[D],
NIRC);
c. Foreign service contractor or
subcontractor engaged in
petroleum operations in the
Philippines (Sec. 25[D], NIRC).

Q: Who is a minimum wage earner?

A: The term minimum wage earner shall refer

to a worker in the private sector paid the
statutory minimum wage, or to an employee in
the public sector with compensation income of
not more than the statutory minimum wage in
the non-agricultural sector where he/she is
assigned. (Sec. 22 [HH], NIRC, as added by RA
9504)

Q: What is meant by statutory minimum wage?

A: It is the rate fixed by the Regional Tripartite

Wage and Productivity Board, as defined by the
Bureau of Labor and Employment Statistics of the
Department of Labor and Employment. (Sec. 22
[GG], NIRC as added by R.A. No. 9504)

Q: What is the tax treatment with Minimum

Wage Earners?

A: The earnings of Minimum Wage Earners are

exempt from income tax. (Sec. 24 A [2], NIRC as
amended by RA 9504)

Q: How are the individuals in number 2 taxed?

A: There shall be levied, collected and paid for

each taxable year upon the gross income received
by these individuals employed by multinational
companies, offshore banking units and petroleum
service contractors and subcontractor received as
salaries, wages, annuities, compensation,
remuneration and other emoluments, such as
honoraria and allowances, a tax equal to 15% of
such gross income. (Sec. 25, NIRC)

Note: For other income of said individuals sourced

within the Philippines, it shall be subject to the
applicable income tax, that is, graduated rates, final
tax on passive income, capital gains depending
whether a citizen or an alien, as the case may be.

Corporations

Q: What is a corporation for tax purposes?

A:
1. The term corporation shall include:
a. Partnerships, no matter how
created
b. Joint stock companies
c. Joint accounts (cuentas en
participacion)
d. Associations
e. Insurance companies
2. It does not include:
a. General professional partnerships
and
b. A joint venture or consortium
formed for purposes of
undertaking construction projects
engaging in:
i. Petroleum

ii. Coal
iii. Geothermal
iv. Other energy operations
pursuant to an operating or
consortium agreement under
a service contract with the
Government.

Q: What are the kinds of corporation under the

NIRC?

A:
1. Domestic Corporation (DC)
a
corporation created or organized in the
Philippines or under its laws and liable
for income from sources within and
without the Phillipines (Sec 22[C], NIRC)

2. Resident Foreign Corporation (RFC)

a
corporation which is not domestic and
not engaged in trade or business in the
Philippines is liable for income from
sources within.

Note: In order that a foreign corporation

may be regarded as doing business within
a State there must be continuity of
conduct and intention to establish a
continuous business, such as the
appointment of a local agent and not one
of a temporary character. (CIR v. BOAC, GR
L-65773-74, Apr. 30, 1987)

3. Non-Resident Foreign Corporation

(NRFC) a corporation which is not
domestic and not engaged in trade or
business in the Philippines is liable for
income from sources within. (Sec.22 [I],
NIRC)

4. Special Types of Corporation

those
corporations subject to different tax
rates.
a. Proprietary educational
institutions and non-profit
hospitals
b. Domestic depositary bank (foreign
currency deposit units)
c. International carriers
d. Offshore banking units
e. Regional or Area Headquarters and
Regional operating Headquarters
of multinational companies
f. Non-resident cinematographic film
owners, lessors or distributors
g. Non-resident owners or lessors of
vessels chartered by Philippine
nationals
h. Non-resident lessors of aircraft,
machinery and other equipments

Q: What is the test in determining the status of

corporations?

A: Under the law of incorporation test , a

corporation is considered:

1. Domestic Corporation
If organized or
created in accordance with or under the
laws of the Philippines;
2. Foreign Corporation Organized or
created in accordance with or under the
laws other than the Philippines.

Q: What are the modes by which a foreign

corporation seeking to do business in the
Philippines may adopt?

A:
1. Setting up a Domestic Subsidiary
This
involves incorporation under Philippine
laws.

Note: For tax purposes, the subsidiary

becomes a domestic corporation while the
parent company remains a non-resident
foreign corporation.

2. Doing Business Through a Branch or

Representative Office
This mode
requires acquisition by the foreign
corporation of a license to do business in
the Philippines. The branch office does not
obtain a separate juridical personality but
becomes merely an extension of its parent
company unlike a domestic subsidiary. The
foreign company upon acquiring a license
to do business through a branch or
representative office becomes a resident
foreign corporation with respect to the
transactions that are effectively connected
with its business in the Philippines.
Otherwise, it shall be considered a nonresident foreign corporation with respect
to transactions that are not effectively
connected with its business here.

Q: What is the test to determine whether a FC is

a resident or non-resident?

A: To be a resident foreign corporation, a FC

should obtain first a license from the Philippine
Government to operate business in the
Philippines through establishment of a branch or
a representative office, otherwise they are
considered as non-resident foreign corporation.

Q: What are the special RFC?

A:
1. International carriers
2. Offshore banking unit
3. Foreign currency deposit unit
4. Regional or area headquarters of
multinational corporations
5. Regional operating headquarters of
multinational corporations

Q: What are the special NRFC?

A:
1. NR owner, lessor, distributor of
cinematographic film
2. NR owner or lessor of vessels chartered
by Philippines nationals
3. NR owner or lessor of aircraft,
machinery and equipment

Note: They are only considered special because

different tax rates are applicable to them.

Partnerships and
General Professional Partnerships

Q: What are the classifications of partnerships in

so far as tax is concerned?

A:
1. General Professional Partnership (GPP);
2. Business Partnership.

Q: What is a co-partnership or business

partnership?

A: These are partnerships, other than GPP,

whether registered or not. They are considered as
corporations and therefore are taxed as
corporation.

Note: Partners are considered as stockholders and

profits distributed to them are considered as
dividends subject to final tax.

Q: Is it necessary that the partnership be

registered?

A: Registration of a partnership is immaterial for

income tax purposes. It is taxable as long as the
following requisites concur: AI
1. There is an Agreement, oral or writing,
to contribute money, property, or
industry to a common fund; and
2. There is an Intention to divide the
profits.

Q: What is a GPP?

A: A GPP is a partnership formed by persons for

the sole purpose of exercising their common
profession. (Sec. 22 [B], NIRC)

Q: Is GPP subject to income tax?

A: No, they are not subject to income tax but are

required to file information returns for its income
for the purpose of furnishing information as to
the share in net income of the partnership which
each partner should include in his individual
return. Partners shall be liable for income tax in
their separate and individual capacities. The
share in thepartnership income is taxable to the
individual partners, whether or not the share has
been distributed, because the GPP itself is not

taxable. Thus, there is a constructive receipt of

income in case of GPPs.

Estate

Q: Define estate.

A: Estate refers to the mass of properties left by a

deceased person.

Q: When a person who owns property dies,

what are the taxes payable under the income tax
law?

A:
1. Income tax for individuals from Jan. to
the time of death. (Sec. 24 and 25,
NIRC)
2. Income tax of the estate, if the estate is
under administration or judicial
settlement. (Sec. 60, NIRC)

Trusts

Q: What is a trust?

A: It is a right to the property, whether real or

personal, held by one person for the benefit of
another.

Q: What are the classifications of trust for tax

purposes?

A: TIP

1. Taxable and tax-exempt trust

2. Irrevocable trust and revocable trust
(pass through entity)

3. Trust administered in the Philippines

and trust administered in a foreign
country.

Q: Define revocable and irrevocable trust.

A:
1. Revocable Trust
a kind of trust where
the power to revert (return) to grantor
title to any part of the corpus (body) of
the trust is vested:
a. In the grantor, either alone or in
conjunction with any person not
having a substantial adverse
interest in the disposition of the
corpus or the income therefrom;
or
b. In any person not having a
substantial adverse interest in the
disposition of the corpus or the
income therefrom.

2. Irrevocable Trust a kind of trust which

cannot be altered without the consent
of the beneficiary.

Q: What is the significance of determining

whether the trust is revocable or irrevocable?

A: The income of a revocable trust is included in

computing the taxable income of the grantor
without any of the deductions allowed for
estates while the income of an irrevocable trust is
a separate taxable entity subject to tax as income
of the trust after deducting the allowable
deductions

Q: What is trust administered in the Philippines

and trust administered in a foreign country?

A:
1. Trust Administered in the Philippines
a
kind of trust where the administrator of
the trust is located in the Philippines.
2. Trust administered in a Foreign Country
a kind of trust where the administrator is
located outside of the Philippines.

Q: What is the significance in determining

whether the trust is a trust administered in the
Philippines or in a foreign country?

A: Only trusts adsministered in the Philippines is

subject to Philippine taxes. Thus, there are
deductions allowed for trusts administered in the
Philippines which are not allowed for those
administered in a foreign country.

Co-Ownerships

Q: What are examples of co-ownership?

A:
1. When two or more heirs inherit an
undivided property from a decedent.
2. When a donor makes a gift of undivided
property in favor of two or more
donees.

Q: Is co-ownership subject to income tax?

A:
GR: It shall not be subject to income tax if
the activities of the co-owners are limited to
the preservation of the property and the
collection of income therefrom. In such
case, the co-owners shall be taxed
individually on their distributive share in the
income of the co-ownership.

XPN: If the co-owners invest the income in a

business for profit they would constitute
themselves into a partnership and such shall
be taxable as a corporation.

Q: Brothers A, B and C borrowed a sum of

money from their father which amount together
with their personal monies was used by them for
the purpose of buying real properties. The real
properties they bought were leased to various
tenants. The BIR demanded the payment of
income tax on corporations, real estate dealer s
tax, and corporation residence tax. However, A,
B and C seek to reverse the letter of demand and
be absolved from the payment of the taxes in
question. Are they subject to tax on
corporations?

A: Yes, "Corporations" strictly speaking are

distinct and different from "partnerships". When
the NIRC includes "partnerships" among the
entities subject to the tax on "corporations", it
must allude to organizations which are not
necessarily "partnerships" in the technical sense
of the term. As defined in the NIRC "the term
corporation includes partnership, no matter how
created or organized." This qualifying expression
clearly indicates that a joint venture need not be
undertaken in any of the standards form, or
conformity with the usual requirements of the
law on partnerships, in order that one could be
deemed constituted for the purposes of the tax
on corporations. (Evangelista v. CIR, GR L-9996,
Oct. 15, 1957)

Q: Julia died leaving as heirs her surviving

spouse, Lorenzo and her five children. A
settlement of the estate was instituted in the
CFI. The project partition was approved by the
court however, there was no attempt made to
divide the properties listed. Instead, the
properties remained under the management of
Lorenzo who used said properties by leasing or
selling them and investing the income derived
therefrom. From said investments and
properties, the heirs derived income. The BIR
decided that the heirs formed an unregistered
partnership and therefore subject to corporate
income tax. They protested the assessment and
asked for reconsideration alleging that they are
co-owners of the properties inherited and the
profits derived from the transactions. Are the
heirs of the decedent subject to corporate
income tax?

A: Yes, while as a rule, co-ownership is tax

exempt, the co-ownership of inherited properties
is automatically converted into an unregistered
partnership the moment said common properties
and/or the income derived therefrom are used as
common fund with intent to produce profits. If
after such partition, each heir allows his share to
be held in common with his co-heirs under a
single management to be used with the intent of
making profit thereby in proportion to his share,
there can be no doubt that, even if no document
or instrument were executed for the purpose, for
tax purposes, at least, an unregistered
partnership is formed and therefore subject to
corporate income tax. (Oa, et al v. CIR, GR L19342, May 25, 1972)

Q: Pascual and Dragon bought 2 parcels of land

from Bernardino and 3 from Roque. Thereafter,
the first 2 were sold to Meirenir Development
and 3 to Reyes and Samson. They divided the
profits between the 2 of them. The CIR
contended that they formed an unregistered
partnership or joint venture taxable as a
corporation under the Code and its income is
subject to the NIRC. Decide.

A: No, sharing of returns does not in itself

establish a partnership whether or not the
persons sharing therein have a joint or common
right or interest in the property. (Art. 1769, NCC)
In the present case, there is clear evidence of coownership between the petitioners. There is no

adequate basis to support the proposition that

they thereby formed an unregistered partnership.
The 2 isolated transactions where they purchased
properties and sold the same a few years
thereafter did not thereby make them partners.
The transactions were isolated. The character of
habituality peculiar to business transactions for
the purpose of gain was not present. (Pascual and
Dragon v. CIR, GR 78133, Oct. 18, 1988)

Q: On 2 Mar. 1973, Joe transferred his rights

under contract with Ortigas Co. to his 4 children
to enable them to build residences on the lots.
TCTs were issued. Instead of building houses, his
children sold them to Walled City Securities
Corporation and Olga Cruz Canda. The BIR
required the children to pay corporate income
tax under the theory that they formed an
unregistered partnership or joint venture. Are
they liable for corporate income tax?

A: No, the children are co-owners since they did

not form a partnership. It is an isolated act which
shows no intention to form a partnership. To
regard the children as having formed a taxable
unregistered partnership would result in
oppressive taxation and confirm the dictum that
the power to tax involves the power to destroy. It
appears that they decided to sell it after they
found it expensive to build houses. The division
of the profit was merely incidental to the
dissolution of the co-ownership which was in the
nature of things a temporary state. (Obillos, Jr. v.
CIR, GR L-68118, Oct. 29, 1985)

INCOME TAXATION

Q: What is income tax?

A: A tax on all yearly profits arising from property,

profession, trade or business, or a tax on person s
income, emoluments, profits and the like. (Fisher
v. Trinidad, GR L-19030. Oct. 20, 1922)

Q: What is the basis of income tax?

A: Income tax is based on income, either gross or

net, realized in one taxable year.

Q: What is the nature of income tax?

A: It is generally regarded as an excise tax. It is

not levied upon persons, property, funds or
profits but on the privilege of receiving said
income or profit.

Q: What are the purposes of income tax?

A: To:
1. Provide large amounts of revenue
2. Offset regressive sales and consumption
taxes

3. Mitigate the evils arising from the

inequality in the distribution of income
and wealth which are considered
deterrents to social progress, by a
progressive scheme of taxation
(Madrigal v. Rafferty, GR 12287, Aug. 8,
1918)

Q: What is the State Partnership Theory?

A: It is the basis of the government in taxing

income. It emanates from its partnership in the
production of income by providing the protection,
resources, incentive and proper climate for such
production. (CIR v. Lednicky, G.R. Nos. L-18169, L18262 & L-21434, July 31, 1964)

Q: Distinguish income tax from property tax.

A:
INCOME TAX
PROPERTY TAX
Incidence
The incidence of an
income tax falls on the
earner.
The incidence of a
property tax is on the
property itself.
Who pays the tax
Income tax is paid by the
earner.
Property tax is paid by the
owner of the property.
How measured
Income tax is measured
by the amount of income
received over a period of
time

Property tax is measured

by the value of the
property at a particular
date.
Frequency of taxation
Income is taxed only
once.
Property may be taxed on
a recurrent basis.

Definition of Income

Q: What is income?

A: It refers to all wealth which flows into the

taxpayer other than as mere return of capital. It
includes the forms of income specifically
described as gains and profits, including gains
derived from the sale or other disposition of
capital assets. (Sec. 36, RR No.2)

Income is a flow of service rendered by capital by

payment of money from it or any benefit
rendered by a fund of capital in relation to such
fund through a period of time. (Madrigal v.
Rafferty, GR 12287, Aug. 8, 1918)

An income is an amount of money coming to a

person or corporation within a specified time,
whether as payment for services, interest or
profit from investment. Unless otherwise
specified, income means cash or its equivalent.
(Conwi v. CIR, GR 48532, Aug. 31, 1992)

Q: How does

A:
Capital

income differ from

capital ?

Income
Constitutes the
investment which is the
source of income
Any wealth which flows into
the taxpayer other than a
mere return of capital
Is the wealth
Is the service of wealth
Is the tree
Is the fuit
Fund
Flow

(Madrigal v. Rafferty, 38 Phil. 414)

Q: What are the types of taxable income?

A:
1. Compensation Income
income derived
from rendering of services under an
employer-employee relationship
2. Professional Income fees derived from
engaging in an endeavor requiring
special training as professional as a
means of livelihood, which includes, but
not limited to, the fees of CPAs,
lawyers, engineers and the like.
3. Business Income gains or profits
derived from rendering services, selling
merchandise, manufacturing products,
farming and long-term contracts.
4. Passive Income
income in which the
taxpayer merely waits for the amount
to come in, which includes, but not
limited to interest income, royalty
income, dividend income, winnings
prizes.
5. Capital Gain gain from dealings in
capital assets.

Q: What kinds of income are subject to

graduated rates?

A:
1. Compensation income
2. Business and professional income
3. Capital gains not subject to capital gains
tax
4. Passive income not subject to final tax
5. Other income

Q: Assuming Mr. R withdraws money from his

bank account, is it income?

A: No, because income is other than a mere

return of capital.

Q: Is payment by mistake considered income for

tax purposes?

A: As a
taxable
benefit
Javier,

general rule, payment by mistake is not

except if the recipient received material
out of the erroneous payment. (CIR v.
GR 78953, July 31, 1991)

Note: In CIR v. Javier the issue raised was the

imposition of the 50% fraud penalty and not the
income taxation of money received through mistake.

Q: Is income held in trust for another taxable?

A:
GR: It is not taxable since the trustee has no
free disposal of the amount thereof

XPN: If the income under trust may be

disposed of by the trustee without limitation
or restriction such amount is taxable. (North
American Consolidated v. Burnet, 286 U.S. 417
[1932])

Q: Are security advances and security deposits

paid by a lessee to a lessor considered income
for tax purposes?

A: No, the amount received by the lessor as

security advances or deposits will eventually be
returned to the lessees, hence the lessor did not
earn gain or profit therefrom. (Tourist Trade and
Travel v. CIR, CTA Case No. 4806, Jan. 19, 1996)

Q: Suppose the gain or profit is in the nature of

property or in kind, can we not consider it as
taxable gain?

A: Under Sec. 32 A [1] compensation for services

can be in whatever form paid. Therefore whether
paid in cash, kind, property, stock and other form,
such is taxable.

Q: What then is the tax basis?

A: It is the value of the property in cash under the

doctrine of cash equivalent in taxation.

Q: Is the mere increase in the value of property

considered income?

A: No, since it is an unrealized increase in capital.

Q: What are the requisites for income to be

taxable?

A: REG
1. The gain must be Realized or received;
2. The gain must not be Excluded by law
or treaty from taxation; and
3. There must be Gain or profit, whether
in cash or its equivalent. (CIR v.
Manning, GR L-28398, Aug. 6, 1975)

Q: What are the tests in determining whether

income is earned for tax purposes?

A:
1. Flow of Wealth Test
The determining
factor for the imposition of income tax
is whether or not any gain or profit was
derived from the transaction. (Collector
v. Administratix of the Estate of Echarri,
GR 45544, Apr. 25, 1939)

2. Realization Test
Unless income is
deemed realized, then there is no
taxable income.

Revenue is generally recognized when

both conditions are met:
a. The earning process is complete or
virtually complete; and
b. An exchange has taken place.
(Manila Mandarin Hotels, Inc. v.
CIR)

3. Economic-benefit Principle
Taking into
consideration the pertinent provisions
of law, income realized is taxable only
to the extent that the taxpayer is
economically benefited.

4. Claim of Right Doctrine A taxable gain

is conditioned upon the presence of a
claim of right to the alleged gain and
the absence of a definite unconditional
obligation to return or repay.

5. Severance Test
Income is recognized
when there is separation of something
which is of exchangeable value. (Eisner
v. Macomber, 252 US 189 [1920])

6. Net Effect Test The substance of the

whole transaction, not the form, usually
controls the tax consequences.

7. Principle of Constructive Receipt of

Income Income which is credited to
the account of or set apart for a
taxpayer and which may be drawn upon
by him at any time is subject to tax for
the year during which so credited or set
apart, although not then actually
reduced to possession.

Q: What are the conditions in the realization of

income?

A: Under the realization principle, revenue is

generally recognized when both of the following
conditions are met:
1. The earning process is complete or
virtually complete
2. An exchange has taken place (Manila
Mandarin Hotels, Inc. v. CIR)

Q: Distinguish Actual and Constructive Receipt

A:
1. Actual receipt
income may be actual
receipt or physical receipt.
2. Constructive receipt
occurs when
money consideration or its equivalent is
placed at the control of the person who
rendered the service without restriction
by the payor. (Sec. 4.108-A, RR 16-2005)

Examples of income constructively

received:
a. Deposit in banks which are made
available to the seller of services
without restrictions
b. Issuance by the debtor of a notice
to offset any debt or obligation
and acceptance therepf by the
seller as payment for services
rendered
c. Transfer of the amounts retained
by the payor to the account of the
contractor
d. Interest coupons that have
matured and are payable but have
not been encashed

e. Undistributed share of a partner in

the profits of a general partnership

Methods of Accounting

Q: What are the methods of accounting in

computing net income?

A:
1. Cash Method
recognition of income
and expense dependent on inflow or
outflow of cash.
2. Accrual Method
gains and profits are
included in gross income when earned
whether received or not, and expenses
are allowed as deductions when
incurred, although not yet paid. It is the
right to receive and not the actual
receipt that determines the inclusion of
the amount in the gross income.

Q: How is the income of a taxpayer computed?

A:
GR: Net income shall be computed in
accordance with the method of accounting
regularly employed in the books of the
taxpayer.

XPN: Computation shall be made in such

method as in the opinion of CIR clearly reflects
the income:
1. If no such method has been so
employed by the taxpayer;
2. If the method of accounting employed
does not clearly reflect the income.
(Sec. 43, NIRC)

Q: When is installment payment used?

A: Installment method is appropriate when

collections extend over relatively long periods of
time and there is a strong possibility that full
collection will not be made.

Q: What is Deferred Payment?

A: Initial payments exceed 25% of the gross

selling price and such transaction shall be treated
as cash sale which makes the entire selling price
taxable in the month of sale.

Q: What are long-term contracts?

A: Long-term contract means building,

installation or construction contracts covering a
period in excess of one year.

Q: What is percentage of completion?

A: In case of long-term contracts, persons whose

gross income is derived from such contracts shall
report such income upon the basis of percentage
of completion.

Q: What are the methods for determining the

percentage for completion of a contract?

A:
1. The costs incurred under the contract as
of the end of the tax year are compared
with the estimated total contract costs; or
2. The work performed on the contract as of
the end of the year is compared with the
estimated work to be performed.

GROSS INCOME

Q: What is gross income taxation?

A: It is a system of taxation where the income is

taxed at gross. The taxpayer under this system is
not entitled to any deduction.

Q: What is the definition of

under the NIRC?

gross income

A: Except when otherwise provided, gross income

means all income derived from whatever source,
including (but not limited to) to the following
items: [CG2I- R2DAP3]
1. Compensation for services in whatever
form paid, including, but not limited to
fees, salaries, wages, commissions and
similar items;
2. Gross income derived from the conduct
of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities
9. Prizes and winnings;
10. Pensions; and
11. Partner s distributive share from the net
income of the general professional
partnership. (Sec. 32 [A], NIRC)

Note: Gross income under Sec. 32 is different from

the limited meaning of Gross Income for purpose of
Minimum Corporate Income Tax (MCIT), which
means Gross Sales less Sales Returns, Discounts, and
Allowances and Cost of Goods Sold.

The above enumeration can be simplified into 5

categories:
1. Compensation Income - income derived
from rendering of services under an

employer-employee relationship.
2. Professional Income - fees derived from
engaging in an endeavor requiring
special training as professional as a
means of livelihood, which includes, but
not limited to, the fees of CPAs,
lawyers, engineers and the like.
3. Business Income - gains or profits
derived from rendering services, selling
merchandise, manufacturing products,
farming and long-term contracts.
4. Passive Income - income in which the
taxpayer merely waits for the amount
to come in, which includes, but not
limited to interest income, royalty
income, dividend income, prizes and
winnings.
5. Gains from Dealings in Property
It
includes all income derived from the
disposition of property whether real,
personal or mixed.

Q: Is the enumeration exclusive?

A: No, under Sec. 32 (A) of the NIRC, gross income

means all income derived from whatever source.

Therefore the source is immaterial whether

derived from illegal, legal, or immoral sources, it
is taxable.
As such, income includes the following among
others:
1. Treasure found;
2. Punitive damages representing profit
lost;
3. Amount received by mistake;
4. Cancellation of the taxpayer s
indebtedness;
5. Receipt of usurious interest;
6. Illegal gains;
7. Taxes paid and claimed as deduction
subsequently refunded;
8. Bad debt recovery.

Q: What is income from whatever source?

A: All income not expressly excluded or exempted

from the class of taxable income, irrespective of
the voluntary or involuntary action of the
taxpayer in producing the income. (Gutierrez v.
CIR, CTA case)

Q: What comprises cost of goods sold?

A: It includes all business expenses directly

incurred to produce the merchandise and bring
them to their present location such as direct
labor, materials and overhead expenses. (Sec. 27
[A], NIRC)

Q: What comprises cost of services?

A: All direct costs and expenses necessarily

incurred to provide the service required by the
customers and clients including:
1. Salaries and employee benefits of
personnel, consultants, and specialists
directly rendering the service
2. Cost of facilities directly utilized in
providing the service (Sec. 27 E [4], NIRC)

Q: Is money received under payment by mistake,

income subject to income tax?

A: Income paid or received through mistake may

be considered as income from whatever source
derived irrespective of the voluntary or
involuntary action of the taxpayer in producing
income. Moreover, under the claim of right
doctrine, the recipient even if he has the
obligation to return the same has a voidable title
to the money received through mistake.
(Guttierez v. CIR, CTA Case No. 65, Aug. 31, 1965)

Q: Define

gross receipts.

A: The term includes all income whether actually

or constructively received.

Q: Congress enacted a law imposing a 5% tax on

the gross receipts of common carriers. The law
does not define the term gross receipts.
Express Transport a bus company has time
deposits with ABC Bank. In 2007, Express
Transport earned P1 Million interest, after
deducting the 20% final withholding tax from its
time deposits with the bank. The BIR wants to
collect a 5% gross receipts tax on the interest
income of Express Transport without deducting
the 20% final withholding tax. Is the BIR correct?

A: Yes. The term gross receipts is broad enough

to include income not physically rendered but
constructively received by the taxpayer. After all,
the amount withheld is paid to the government
on its behalf, in satisfaction of its withholding
taxes. The fact that it did not actually receive the
amount does not alter the fact that it is remitted
for its benefit in satisfaction of its tax obligations.
Since the income is withheld is an income owned
by Express Transport, the same forms part of its
gross receipts. (CIR v. Bank of Commerce,GR
149636, June 8, 2005) (2006 Bar Question)

Q:What is net income taxation?

A: It is a system of taxation where the income

subject to tax may be reduced by allowable
deductions.

Q: What is taxable income or net income?

A: All pertinent items of gross income specified in

the NIRC, less the deductions and/or personal and
additional exemptions, if any, authorized for such
types of income by the NIRC or other special laws.

Q: Distinguish gross income from net income.

A:
GROSS INCOME
NET INCOME
As to deductions
Allows no deductions
Allows deductions
As to exemptions
Grants no exemptions
Grants exemptions
As to tax base
Gross Income
Net Income
Advantages/Disadvantages
Simplifies the income tax
system
Confusing and complex
process of filing income
tax return
Substantial reduction in
corruption and tax
evasion as the exercise
of discretion, to allow or
disallow deductions, is
dispensed with

Vulnerable to corruption
on account of margin of
discretion in the grant of
deductions
More administratively
feasible
Provides equitable
releifs in the form of
deductions, exemptions
and tax credit
Does away with wastage
of manpower and
supplies
Tax audit minimizes
fraud

Q: Explain briefly whether the following items

are taxable or non-taxable:
1. Income from jueteng;
2. Gain arising from expropriation of property;
3. Taxes paid and subsequently refunded
4. Recovery of bad debts previously charged
off;
5. Gain on the sale of a car used for personal
purposes.

A:
1. Taxable, for gross income includes "all
income derived from whatever source,"
(Sec. 32 [A], NIRC) interpreted as all
income not expressly excluded or
exempted from the class of taxable
income, irrespective of the voluntary or
involuntary action of the taxpayer in
producing the income. Thus, the income
may proceed from a legal or illegal
source such as from jueteng. Unlawful
gains, gambling winnings, etc. are
subject to income tax. The NIRC stands
as an indifferent neutral party on the
matter of where the income comes
from. (CIR v. Manning, GR L-28398, Aug.
6, 1975)

2. Taxable, for sale, exchange or other

disposition of property to the
government of real property is taxable.
It includes taking by the government
through condemnation proceedings.

(Gonzales v. CTA, GR L-14532, May 26,

1965)

3. Taxable, if the taxes were paid and

subsequently claimed as deduction and
which are subsequently refunded or
credited. It shall be included as part of
gross income in the year of the receipt
to the extent of the income tax benefit
of said deduction. (Sec. 34 C [1], NIRC)

Not taxable if the taxes refunded were

not originally claimed as deductions.

4. Taxable under the tax benefit rule.

Recovery of bad debts previously
allowed as deduction in the preceeding
years shall be included as part of the
gross income in the year of recovery to
the extent of the income tax benefit of
said deduction. (Sec. 34 E [1], NIRC) This
is sometimes referred as the Recapture
Rules.

5. Taxable, since the car is used for

personal purposes, it is considered as a
capital asset hence the gain is
considered income. (Sec. 32 A [3] and
Sec. 39 A [1], NIRC) (2005 Bar Question)

Q: Lao is a big-time swindler. In one year he was

able to earn P1 Million from his swindling
activities. When the CIR discovered his income
from swindling, the CIR assessed him a
deficiency income tax for such income. The
lawyer of Lao protested the assessment on the
following grounds:
1. The income tax applies only to legal income,
not to illegal income;
2. Lao's receipts from his swindling did not
constitute income because he was under
obligation to return the amount he had
swindled, hence, his receipt from swindling
was similar to a loan, which is not income,

because for every peso borrowed he has a

corresponding liability to pay one peso; and
3. If he has to pay the deficiency income tax
assessment there will be hardly anything
left to return to the victims of the
swindling. How will you rule on each of the
three grounds for the protest?

A:
1. Sec. 32 of the NIRC includes within the
purview of gross income all Income
from whatever source derived. Hence,
the illegality of the income will not
preclude the imposition of the income
tax thereon.

2. When a taxpayer acquires earnings,

lawfully or unlawfully, without the
consensual recognition, express or
implied, of an obligation to repay and
without restriction as to their
disposition, he has received taxable
income, even though it may still be
claimed that he is not entitled to retain
the money, and even though he may
still be adjudged to restore its
equivalent. To treat the embezzled
funds as not taxable income would
perpetuate injustice by relieving
embezzlers of the duty of paying
income taxes on the money they enrich
themselves with, by embezzlement,
while honest people pay their taxes on
every conceivable type of income.
(James v. U.S., 202 US 401 [1906])

3. The deficiency income tax assessment is

a direct tax imposed on the owner
which is an excise on the privilege to
earn an income. It will not necessarily
be paid out of the same income that
was subjected to the tax. Lao s liability
to pay the tax is based on his having
realized a taxable income from his
swindling activities and will not affect
his obligation to make restitution.
Payment of the tax is a civil obligation
imposed by law while restitution is a
civil liability arising from a crime. (1995
Bar Question)

Q. What are the classifications of income as to

source?

A.
1. Income from
Philippines
2. Income from
Philippines
3. Income from
partly without

sources within the

sources without the
sources partly within or
the Philippines

Compensation Income

Q: What is compensation income?

A: It includes all remuneration for services

rendered by an employee for his employer unless
specifically excluded under the NIRC. (Sec. 2.78.1,
RR 2-98)

The name by which the renumeration for services

is designated is immaterial. Thus, salaries, wages,
emoluments, honoraria, allowances, commissions
(i.e. transportation, representation,
entertainment and the like); fees including
director s fees, if the director is, at the same time,
an employee of the employer/ corporation;
taxable bonuses and fringe benefits except those
which are subject to the fringe benefits tax;
taxable pensions and retirement pay; and other
income of a similar nature constitute
compensation income. (Sec. 2.78.1, RR 2-98)

Q: What is the test to determine whether an

income is compensation or not?

A: The test is whether such income is received by

virtue of an employer-employee relationship.

Q: What are the requisites for taxability of

compensation income?

A: PSR
1. Personal services actually rendered;
2. Payment is for such Services rendered;
and
3. Payment is Reasonable.

Q: Is the payment for the services rendered by

an independent contractor considered as
compensation income?

A: No, since there is no employer-employee

relationship. The test of control is absent. The
income of the independent contractor is derived
from the conduct of his trade or business which is
considered as business income and not
compensation income.

Q: Give an instance that payment is made for

services rendered yet it may not qualify as
compensation income.

A: The share of a partner in a general professional

partnership. The general partner rendered
services and the payment is in the form of a share
in the profits is not within the meaning of
compensation income because it is derived from
the exercise of profession classified as
professional income.

Q: Define fringe benefit.

A: Fringe benefit is any good, service or other

benefit furnished or granted by an employer in
cash or in kind in addition to basic salaries, to an
individual employee, except a rank and file
employee, such as but not limited to:
HEV-HIM-HEEL
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid,
driver and others
5. Interest on loans at less than market
rate to the extent of the difference
between the market rate and the actual
rate granted
6. Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs or
other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses;
9. Educational assistance to the employee
or his dependents
10. Life or health insurance and other nonlife insurance premiums or similar
amounts in excess of what the law
allows (Sec. 33 [B], NIRC; Sec. 2.33 [B],
RR 3-98)

Q: What are the notable distinctions between

compensation income and fringe benefit?

A:
COMPENSATION INCOME
FRINGE BENEFIT

As part of gross income of an employee

Part of the gross income of
an employee
GR: Not reported as part
of the gross income of an
employee
XPN: Fringe benefits
given to rank and file
employees are included
in his gross income
As to who is liable to pay the tax
Employee liable to pay the
tax on his income earned
Employer liable to pay
the fringe benefits tax
and can be deducted as
business expense
As to treatment
Subject to creditable
withholding tax
the
employer withholds the
tax upon the payment of
the compensation income
Subject to Final Tax

Q: What is the treatment of fringe benefit?

A:
GR: Subject to final tax on the grossed-up
monetary value of fringe benefits furnished
or granted to the employee to be paid by
the employer.

XPN: When given to rank and file

employees, it becomes part of their
compensation income. (Sec. 33, NIRC)

Q: Give the rule on taxation of fringe benefits

received by different employees.

A: A Fringe Benefit Tax (FBT) is imposed on the

grossed-up monetary value of the fringe benefit
furnished, granted or paid by the employer to
managerial and supervisory employees. (Sec. 33
[A], NIRC)

Q: What are the kinds of fringe benefits that are

not subject to the FBT?

A:
1. Fringe benefits which are authorized
and exempted from tax under special
laws
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans;
3. Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not;
4. De minimis benefits as defined in the
rules and regulations to be
promulgated by the Secretary of
Finance, upon recommendation of the
CIR
5. When the fringe benefit is required by
the nature of, or necessary to the
trade, business or profession of the
employer
6. When the fringe benefit is for the
convenience of the employer. This is
known as Employer s Convenience Rule.
(Sec. 32, NIRC; Sec. 2.33 [C], RR 3-98)

Business/Trade/Professional Income

Q: What comprises business income?

A: It refers to income derived from

merchandising, mining, manufacturing and
farming operations.

Note: Business is any activity that entails time and

effort of an individual or group of individuals for
purposes of livelihood or profit.

Q: What is professional income?

A: It refers to the fees received by a professional

from the practice of his profession, provided that
there is no employer-employee relationship
between him and his clients.

Gains Derived from Dealings in Property

Q: What does gains derived from dealings in

property mean?

A: It means all income derived from the

disposition of property whether real, personal or
mixed for:
1. Money, in case of sale
2. Property, in case of exchange
3. Combination of both sales and
exchange, which results in gain

Note: Gain is the difference between the proceeds

of the sale or exchange and the acquisition value of
the property disposed by the taxpayer.

Q: State with reason the tax treatment of the

following in the preparation of annual income
tax returns: Income realized from sale of: (1)
capital assets; and (2) ordinary assets.

A:

1. Generally, income realized from the

sale of capital assets are not reported in
the income tax return as they are
already subject to final taxes (capital
gains tax on real property and shares of
stocks.) What are to be reported in the
annual income tax return are the capital
gains derived from the disposition of
capital assets other than real property
or shares of stocks in domestic
corporations which are not subject to
final tax.
2. Income realized from sale of ordinary
assets is part of Gross Income, included
in the Income Tax Return. (Sec. 32 A [3],
NIRC) (2005 Bar Question)

Note: Gain from sale or exchange of capital assets

other than (1) real property and (2) shares of stock
or securities not traded in the stock exchange are
likewise included in the gross income.

CAPITAL GAINS TAX

Principles

Q: Distinguish "capital asset" from "ordinary

asset".

A: The term capital asset is defined by an

exclusion of all ordinary assets. Thus, those
properties not specifically excluded in the
statutory definition constitutes capital assets, the
profits or losses on the sale or the exchange of
which are treated as capital gains or capital

losses. Conversely, all those properties specifically

excluded are considered as ordinary assets and
the profits or losses realized must have to be
treated as ordinary gains or ordinary losses.

Accordingly, "Capital assets" includes property

held by the taxpayer whether or not connected
with his trade or business, but the term does not
include any of the following, which are
consequently considered as "ordinary assets":
[SOUR]
1. Stock in trade of the taxpayer or other
property of a kind which would properly
be included in the inventory of the
taxpayer if on hand at the close of the
taxable year
2. Property held by the taxpayer primarily
for sale to customers in the Ordinary
course of trade or business
3. Property Used in the trade or business
of a character which is subject to the
allowance for depreciation provided in
the NIRC
4. Real property used in trade or business
of the taxpayer

The statutory definition of "capital assets"

practically excludes from its scope, all property
held by the taxpayer if used in connection with
his trade or business. (2003 Bar Question)

Q: What are examples of capital asset?

A:
1. Jewelries not used for trade or business
2. Residential houses and lands owned
and used as such
3. Automobiles not used in trade or
business
4. Stock and securities held by taxpayers
other than dealers in securities

Q: What are examples of ordinary assets?

A:
1. The condominium building owned by a
realty company, the units of which are
for rent or for sale
2. Machinery and equipment of a
manufacturing concern subject to
depreciation
3. The motor vehicles of a person engaged
in transportation business

Q: May capital asset be reclassified as ordinary

asset?

A: Yes, property initially classified as capital asset

may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tends to
show that the activity was in furtherance of or in
the course of the taxpayer s trade or business.

Note: Properties classified as ordinary assets for

being used in business other than real estate
business are automatically converted into capital
assets upon showing that the same have been used
in business for more than two years prior to the
consummation of the taxable transactions involving
said properties.

Q: In 1990, Naval bought a lot for P1 million in a

subdivision with the intention of building his
residence on it. In 1994, he abandoned his plan
because the surrounding area became a
depressed area and land values in the
subdivision went down; instead, he sold it for
P800,000. At the time of the sale, the zonal value
was P500,000. Is the land a capital asset or an
ordinary asset?

A: The land is a capital asset because it is neither

for sale in the ordinary course of business nor a
property used in the trade or business of the
taxpayer. (Sec. 39 [A], NIRC) (1995 Bar Question)

Q: In Jan. 1970, Juan bought 1 hectare of

agricultural land in Laguna for P100,000. This
property has a current fair market value of P10

million in view of the construction of a concrete

road traversing the property. Juan agreed to
exchange his agricultural lot in Laguna for a onehalf hectare residential property located in
Batangas, with a fair market value of P10
million, owned by Alpha Corporation, a domestic
corporation engaged in the purchase and sale of
real property. Alpha Corporation acquired the
property in 2007 for P9 million. What is the
nature of the real properties exchanged for tax
purposes - capital or ordinary asset?

A: The one hectare agricultural land owned by

Juan is a capital asset because it is not a real
property used in trade or business. The one-half
hectare residential property owned by Alpha
Corporation is an ordinary asset because the
owner is engaged in the purchase and sale of real
property. (Sec. 39, NIRC; RR 7-03) (2008 Bar
Question)

Q: Distinguish ordinary gain from capital gain.

A: Ordinary gain is a gain derived from the sale or

exchange of ordinary assets such as SOUR while
Capital gain is a gain derived from the sale or
exchange of capital assets or property not

connected with the trade or business of the

taxpayer other than SOUR.

Q: Distinguish Actual Gain from Presumed Gain?

A: Actual Gain
asset.

excess of the cost from a sale of

Presumed Gain pressumtion of law that the

seller realized gains, which is taxed at 6% of the
selling price or fair market value, whichever is
higher.

Q: Distinguish ordinary income from ordinary

loss?

A: Ordinary Income includes the gain derived

from the sale or exchange of ordinary asset while
Ordinary Loss is the loss that may be sustained
from the sale or exchange of ordinary asset.

Q: Differentiate capital gain from capital loss.

A: Capital Gain includes the gain derived from

the sale or exchange of an asset not connected
with the trade or business. Capital Loss is the loss
that may be sustained from the sale or exchange
of an asset not connected with the trade or
business. Capital loss may not exceed capital
gains when used as a deduction to income.

Q: What are the kinds of capital gain under the

provisions of the NIRC?

A:
1. Capital Gains Subject to Final Tax usually imposed upon the sale,
exchange or other disposition of:
a. Real property
b. Shares of stock that are not traded
through the stock exchange

2. Capital Gains Included in Gross Income

for Income Tax Purposes - includes sale
and other disposition of capital assets
other than those enumerated above.
The gain is included in the gross income
of the taxpayer.

Q: Distinguish capital gains subject to final tax

from capital gains reported in the income tax
return.

A:
SUBJECT TO
FINAL TAX
REPORTED IN
THE ITR
As to deductions
There is a fixed rate for
the tax
The capital gains are
aggregated with other
income to constitute

gross income subject to

deductions
As to actual gains
GR: It does not matter
whether or not capital
gains are actually earned
(presumed gains)

XPN:Disposition of shares
not traded in the stock
exchange or thru initial
public offering
There must be actual

capital gains earned

As to holding period
GR: Holding period is
immaterial

XPN:Disposition of shares
not traded in the stock
exchange or thru initial
public offering
Holding period is
considered.
As to Net Loss Carry Over
Not allowed.
Could be availed.

Q: What is the treatment of capital gains and

losses?

A:
1. From Sale of Stocks of Corporations
a. Stocks Traded in the Stock
Exchange subject to stock
transaction tax of of 1% on its
gross selling price
b. Stocks Not Traded in the Stock
Exchange subject to capital gains
tax

2. From Sale of Real Properties in the

Philippines
capital gain derived is
subject to capital gains tax but no loss
is recognized because gain is
presumed.

3. From Sale of Other Capital Assets - the

rules on capital gains and losses apply

in the determination of the amount to
be included in gross income and not
subject to capital gains tax.

Sale or Other Disposition of Real Property

Q: Explain the tax treatment of sale or

disposition of real property treated as capital
asset.

A: A final tax of 6% shall be imposed based on

the higher amount between:
1. The gross selling price; or

2. Whichever is higher between the

current fair market value as
determined by:
a. Zonal Value
prescribed zonal
value of real properties as
determined by the CIR; or
b. Assessed Value
the fair market
value as shown in the schedule of
values of the Provincial and City
assessors (Sec. 24 D [1], NIRC)

Note: Actual gain or loss is immaterial since there is

a conclusive presumption of gain.

Q: How is the tax treatment of disposition of

real property deemed capital asset as to
taxpayers liable therefrom?

A: For individuals and corporations

The capital
gains presumed to have been realized from the
sale, exchange or other disposition of real
property located in the Philippines classified as
capital assets. (Sec. 24 D [1], 27 D [5], NIRC)

Note: As regards transactions affected by the 6%

capital gain tax, the NIRC speaks of real property
with respect to individual taxpayers, estate and
trust but only speaks of land and building with
respect to domestic and resident foreign
corporation.

Q: What is the coverage of capital gains and

losses in real estate property?

A: It involves the sale or other disposition of real

property classified as capital asset located in the
Philippines by a non-dealer in real estate.

Q: What is the tax treatment if property is not

located in the Philippines?

A: Gains realized from the sale, exchange or

other disposition of real property, not located in
the Philippines by resident citizens or domestic
corporations shall be subject to ordinary income
taxation (Sec. 4.f, RR 7-2003) but subject to
foreign tax credits.

Such income may be exempt in case of nonresident citizens, alien individuals and foreign
corporations. (Sec. 4.f, RR 7-2003)

Q: In Jan. 1970, Juan bought 1 hectare of

agricultural land in Laguna for P100,000. This
property has a current fair market value of P10
million in view of the construction of a concrete
road traversing the property. Juan agreed to
exchange his agricultural lot in Laguna for a onehalf hectare residential property located in
Batangas, with a fair market value of P10
million, owned by Alpha Corporation, a domestic
corporation engaged in the purchase and sale of
real property. Alpha Corporation acquired the
property in 2007 for P9 million.

1. Is Juan subject to income tax on the

exchange of property? If so what is the tax
base and what is the tax rate?
2. Is Alpha Corporation subject to income tax
on the exchange of property? If so what is
the tax base and rate?

A:
1. Yes, in a taxable disposition of a real
property classified as capital asset the
tax base is the higher between: the fair
market value of the property received
in exchange and the fair market value
of the property exchanged. Since the
fair market value of the two properties
are the same, the said market value
should be taken as the tax base which
is P10million and the income tax rate is
6%. (Sec. 24 [D], NIRC)

2. Yes, the gain from the exchange

constitutes an item of gross income,
and being a business income, it must
be reported in the annual ITR of Alpha
Corporation. From the pertinent items
of gross income, deductions allowed by
law from gross income can be claimed
to arrive at the net income which is the
tax base for the corporate income tax
rate of 35%. (Sec. 27 [A] and Sec 31,
NIRC) (2008 Bar Question)

Note: The applicable tax rate to the case at bar

is still 35% since it was taxed on 2007. Effective
Januray 1, 2009, the corporate income tax rate
is 30%.

Q: What transactions are covered by the

presumed capital gains tax on real property?

A: It covers:
1. Sale;
2. Exchange; or
3. Other disposition, including pacto de
retro and other forms of conditional
sales. (Sec. 24 D [1], NIRC)

Note: Sale, exchange or other disposition includes

taking by the government through expropriation
proceedings.

Q: A corporation, engaged in real estate

development, executed deeds of sale on various

subdivided lots. One buyer, after going around

the subdivision, bought a corner lot with a good
view of the surrounding terrain. He paid P1.2
million, and the title to the property was issued.
A year later, the value of the lot appreciated to
a market value of P1.6 million, and the buyer
decided to build his house thereon. Upon
inspection, however, he discovered that a huge
tower antenna had been erected on the lot
frontage totally blocking his view. When he
complained, the realty company exchanged his
lot with another corner lot with an equal area
but affording a better view. Is the buyer liable
for capital gains tax on the exchange of the lots?

A: Yes, the buyer is subject to capital gains tax on

the exchange of lots on the basis of prevailing fair
market value of the property transferred at the
time of the exchange or the fair market value of
the property received, whichever is higher (Sec.
21 [e], NIRC). Real property transactions subject
to capital gains tax are not limited to sales but
also exchanges of property unless exempted by a
specific provision of law. (1997 Bar Question)

Q: A, a doctor by profession, sold in the year

2000 a parcel of land which he bought as a form
of investment in 1990 for P1 million. The land
was sold to B, his colleague and at a time when
the real estate prices had gone down, for only
P800,000 which was then the fair market value
of the land. He used the proceeds to finance his
trip to the United States. He claims that he
should not be made to pay the 6% final tax
because he did not have any actual gain on the
sale. Is his contention correct?

A: No, the 6% capital gains tax on sale of a real

property held as capital asset is imposed on the
income presumed to have been realized from the
sale which is the fair market value or selling price
thereof, whichever is higher. (Sec. 24 [D], NIRC)
Actual gain is not required for the imposition of
the tax but it is the gain by fiction of law which is
taxable. (2001 Bar Question)

Q: What is the treatment of gains from sale to

the government of real property classified as
capital asset?

A: The taxpayer has the option to either:

1. Include as part of gross income subject
allowable deductions and personal
exemptions, then subject to the
schedular tax; or
2. Subject to final tax of 6% on capital
gains. (Sec. 24 [D], NIRC)

Q: Is the sale of principal residence by an

individual subject to capital gain tax?

A: No, sale of principal residence by an individual

is exempt provided the following requisites are
present:
1. Sale or disposition of the old actual
principal residence;
2. By a citizen or resident alien;
3. Proceeds from which is utilized in
acquiring or constructing a new
principal residence within 18 calendar
months from the date of sale or
disposition;
4. Notify the CIR within 30 days from the
date of sale or disposition through a
prescribed return of his intention to
avail the tax exemption;
5. Can be availed of once every 10 years;
6. The historical cost or adjusted basis of
his old principal residence shall be
carried over to the cost basis of his new
principal residence;
7. If there is no full utilization, the portion
of the gains presumed to have been
realized shall be subject to capital gains
tax; and
8. The 6% capital gains tax due shall be
deposited with an authorized agent
bank subject to release upon
certification by the RDO that the
proceeds of the sale have been utilized.
(RR No. 14-00)

Q: What is a principal residence?

A: It refers to the dwelling house, including the

land on which it is situated, where the individual
and members of his family reside, and whenever

absent, the said individual intends to return.

Actual occupancy is not considered interrupted
or abandoned by reason of temporary absence
due to travel or studies or work abroad or such
other similar circumstances. (RR No. 14-00)

Note: The address shown in the ITR is conclusively

presumed as the principal residence. If the taxpayer
is not required to file a return, certification from
Barangay Chairman or Building Administrator (for
Condominium units) shall suffice.

Q: If the taxpayer constructed a new residence

and then sold his old house, is the transaction
subject to capital gains tax?

A: Yes, exemption from capital gains tax does not

find application since the law is clear that the
proceeds should be used in acquiring or
constructing a new principal residence. Thus, the

old residence should first be sold before

acquiring or constructing the new residence.

Sale of Shares of Stock of Domestic Corporation

Q: What kind of shares of stock is subject to

capital gains tax?

A: Only those sales of shares of stock of a

domestic corporation which is not listed or not
traded in the stock exchange by a non-dealer in
securities.

Q: Who are liable to pay capital gains tax on the

sale of shares of stock not traded in the stock
exchange?

A:
1. Individuals
both citizens and aliens
2. Corporations
both domestic and
foreign
3. Estates and Trusts

Q: What is the controlling factor in sale of

shares of stock?

A: What is controlling is whether or not the

shares of stock are traded in the local stock
exchange and not where the actual sale
happened. (Del Rosario v. CIR, CTA Case No.
4796, Dec. 1, 1994)

Note: If the stock is traded in the stock exchange, it

is not subject to capital gain tax but to stock
transaction tax of of 1% on its gross selling price.

Q: What is the effect if the sale is made by a

dealer in securities?

A: The resulting gain or loss is considered as

ordinary gain subject to graduated rates (5-32%)
for individual and normal corporate income tax
(30%) for corporations.

Q: Explain the tax treatment of sale of shares of

stock considered as capital assets which are not
traded in the stock exchange.

A: The holding period notwithstanding, a final tax

at the rates prescribed below is hereby imposed
upon the net capital gains realized during the
taxable year from the sale, barter or exchange or
other disposition of shares of stock in a domestic
corporation which are not traded in the stock
exchange. (Sec. 24 [C], NIRC)

Not over P100,000

5%

On any amount in excess of P100,000

10%

Q: What is Holding Period?

A: The length of time property is held by the

taxpayer and it is from acquisition to alienation.

Q: What is net capital gain?

A: It is the excess of gains from the sales or

exchanges of capital assets over the losses from
such sales or exchanges.

Q: How is selling price determined?

A: The following rules shall apply in determining

the selling price:
1. In the case of cash sale - the selling

price shall be the total consideration

per deed of sale.
2. If the total consideration is partly in
money and in kind - the selling price
shall be the sum of money and the fair
market value of the property received.
3. In the case of exchange - the selling
price shall be the fair market value of
the property received.
4. In case the fair market value of the
shares of stock sold, bartered or
exchanged is greater than the amount
of money and/or fair market value - the
excess of the fair market value of the
shares of stock SBE over the amount of
money and the fair market value of the
property, if any, received as
consideration shall be deemed a gift
subject to the donor s tax under the
NIRC. (RR 6-2008)

Q: What are the important features as regards

capital gains from sale of shares of stock?

A:
1. No capital loss carry-over for capital
losses sustained during the year (not
listed and traded in a local stock
exchange) shall be allowed but capital
losses may be deducted on the same
taxable year only.
2. The entire amount of capital gains and
capital loss (not listed and traded in a
local stock exchange) shall be
considered without taking into account
the holding period irrespective of the
type/kind of taxpayer.
3. Non-deductibility of losses on wash
sales and short sales.
4. Gain from sale of shares of stock in a
foreign corporation are not subject to

capital gains tax but to graduated rates

either as capital gain or ordinary
income depending on the nature of the
trade of business of the taxpayer.

Q: What is a Short Sale?

A: Any sale of a security which the seller does not

own or any sale which is consummated by the
delivery of a security borrowed by, or for the
account of the seller.

Q: When can one be said to own a security?

A: A person shall be deemed the owner of a

security if he:
1. Or his agent has title to it
2. Has purchased or entered into an
unconditional contract binding on both
parties thereto, to purchase it and has
not yet received it
3. Owns a security convertible into or
exchangeable for it and has tendered
such security for conversion or
exchange
4. Has an option to purchase or acquire it
and has exercised such option
5. Has rights or warrant to subscribe to it
and has exercised such rights or
warrants provided however, that a
person shall be deemed to own
securities only to the extent he has a
net long position in such securities.

Q: John, US citizen residing in Makati City,

bought shares of stock in a domestic
corporation whose shares are listed and traded
in the Philippine Stock Exchange at the price of
P2 Million. A day after, he sold the shares of
stock through his favorite Makati stockbroker at
a gain of P200,000.
1. Is John subject to Philippine income tax on
the sale of his shares through his
stockbroker? Is he liable for any other tax?
2. If John directly sold the shares to his best

friend, a US citizen residing in Makati, at a

gain of 200,000, is he liable for Philippine
income tax? If so what is the tax base and
rate?

A:
1. No, the gain on the sale or disposition
of shares of sock of a domestic
corporation held as capital assets will
not be subjected to income tax if these
shares sold are listed and traded in the
stock exchange (Sec. 24 [C], NIRC).
However, the seller is subject to the
percentage tax of of 1% of the gross
selling price. (Sec. 127 [A], NIRC).

2. Yes, the sale of shares of stocks of a

domestic corporation held as capital,
not through a trading in the local stock
exchange, is subject to capital gains tax
based on the net capital gain during the
taxable year. The tax rate is 5% for a
net capital gain not exceeding P100,000
and 10% for any excess. The tax due
would be P15,000. (2008 Bar Question)

Other Capital Assets

Q: What are other capital assets?

A: These include capital assets other than those:

1. Real property located in the
Philippines; and
2. Shares of stock of a domestic
corporation which is not listed and not
traded in the stock exchange.

Q: What is the tax treatment of sale or exchange

of other capital assets?

A: The gains or losses shall be subject to the

holding period, after which the net capital gain is
determined. The net capital gain (excess of the
gains from sales or exchanges of capital assets
over the loss from such sales/exchanges) are
included in the gross income of the taxpayer
subject to the graduated rates of 5 - 32% for
individuals and the normal corporate income tax
of 30% for corporations. (Sec. 24 [D], NIRC)

Q: What is the significance in determining

whether the asset is ordinary asset or capital
asset?

A: They are subject to different rules. There are

special rules that apply only to capital
transactions, to wit:
1. Holding period rule
2. Capital and loss limitation
3. Net capital loss carry over (NELCO)

Q: What is the holding period rule?

A: Where the capital asset sold has been held by

the taxpayer for more than 12 months, the gain
derived therefrom is taxable only to the extent of
50%. Consequently, if the taxpayer held the
capital asset sold for a year or less, the whole
gain shall be taxable. It is a form of tax avoidance

since the taxpayer can exploit it in order to

reduce his tax due. (Sec. 39 [B], NIRC)

Q: Who can avail the holding period rule?

A: Only individual taxpayers can avail. It is not

allowed to corporations.

Q: Manalo, Filipino citizen residing in Makati

City, owns a vacation house and lot in California,
which he acquired in 2000 for P15 million. On
Jan. 10, 2006, he sold said real property to
Mayaman, another Filipino residing in Quezon
City for P20 million. On Feb. 9, 2006, Manalo
filed the capital gains return and paid P1.2
million representing 6% capital gains tax. Since
Manalo did not derive any ordinary income, no
income tax return was filed by him for 2006.
After the tax audit conducted in 2007, the BIR
officer assessed Manalo for deficiency income
tax computed as follows: P5 million (P20million
less P15 million) x 35%= P1.75 million, without
the capital gains tax paid being allowed as tax
credit. Manalo consulted a real estate broker
who said that the P1.2 million capital gains tax
should be credited from the P1.75 million
deficiency income tax. Is the BIR officer s tax
assessment correct?

A: No, first, the rate of income tax used is the

corporate income tax although the taxpayer is an
individual. Second, the computation of the gain
recognized from the sale did not consider the
holding period of the asset. The capital asset
having been held for more than 12 months, only
50% of the gain is recognized. (Sec. 39 [b], NIRC)

Q: What is the Capital and Loss Limitation Rule?

A: Under this rule, capital loss is deductible only

to the extent of capital gain.

Q: Capital loss is deductible to the extent of

capital gain, what does this mean?

A: This means that you can only deduct capital

loss from capital gain. If there s no capital gain,
no deduction is allowed because you cannot
deduct capital loss from ordinary gain.

Q: Can you deduct ordinary loss from ordinary

gain and from capital gain?

A: Yes for both cases.

Q: What is the Rule on Matching Cost?

A: Under this rule only ordinary and necessary

expense are deductible from gross income or
ordinary Income. Capital loss is a non-business
connected expense as it can be sustained only
from capital transactions. To allow that capital
loss as a deduction from ordinary income would
run counter to the rule on matching cost against
revenue.

Q: What is the treatment of net capital loss

carry-over (NELCO)?

A: If any taxpayer, other than a corporation,

sustains in any taxable year a net capital loss,
such loss (in an amount not in excess of the net
income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more
than 12 months. (Sec. 39 (D), NIRC)

Q: What are the notable distinctions between

NELCO and NOLCO?

A:
NET CAPITAL LOSS
CARRY OVER (NELCO)
NET OPERATING LOSS
CARRY OVER (NOLCO)

As to source
Arises from capital
transactions meaning
involving capital asset
Arises from ordinary
transactions meaning
involving ordinary asset
As to who can avail
Can be availed of by
individual taxpayer only
Can be availed of by
individual and corporate
taxpayer

As to period of carry-over
May be carried over only
in the next succeeding
taxable year
Allows carry over of
operating loss in 3
succeeding taxable years
or in case of mining
companies 5 years

Q: What is net capital loss and net capital gain?

A: Net capital loss is the excess of capital losses

from capital gains. Net capital gain is the excess
of capital gain over the capital loss.

Q: What is the rule regarding expenses that may

include losses?

A:
GR: Expenses that may include losses must be
paid and claimed in the year the same is paid
or incurred.

XPN: In NELCO wherein such loss can be

carried over in the next succeeding taxable
year.

Q: Distinguish the treatment of capital gains and

losses between individuals and corporations.

A:
INDIVIDUAL
CORPORATION
Availability of holding period
Holding period
available
No holding period
Extent of recognition
The percentages of gain or
loss to be taken into
account shall be the ff.:
1. 100% - if the
capital assets
have been held
for 12 mos. or
less; and
2. 50% - if the
capital asset has
been held for
more than 12
months
Capital gains and losses
are recognized to the
extent of 100%

Deductibilty of capital losses

Non-deductibility of Net
Capital losses

Capital losses are allowed

only to the extent of the
capital gains; hence, the
net capital loss is not

deductible.
Non-deductibility of Net
Capital losses

XPN: If any domestic bank

or trust company, a
substantial part of whose
business is the receipt of
deposits, sells any bond,
debenture, note or
certificate or other
evidence of indebtedness
issued by any corporation
(including one issued by a
government or political
subdivision)

Availability of NELCO
NELCO allowed
NELCO Not allowed

Q: When is the rule gain recognized, loss not

recognized made applicable?

A:
1. When the transaction is not solely in
kind that if aside from the property,
cash is also given in the transfer.
2. Illegal transactions
illegal gain is
taxable but illegal loss is not deductible.
3. Transactions between related taxpayer
if there is a gain such is taxable while
the loss is not deductible.
4. Wash sale - one of the illegal trading
services.

Q: What is the rule on the recognition of gain or

loss in exchange of property?

A: Upon the sale or exchange of property, the

entire amount of the gain or loss shall be

recognized.

Q: What is the exception?

A: No gain, no loss shall be recognized means

that if there is a gain it shall not be subject to tax
and if there is a loss it shall not be allowed as a
deduction.

Instances where no gain or loss is recognized:

1. A corporation which is a party to a merger or
consolidation exchanges property solely for
stock in a corporation which is a party to the
merger or consolidation.
2. A shareholder exchanges stock in a
corporation which is a party to the merger or
consolidation solely for the stock of a nother
corporation, also a party to the merger or
consolidation.
3. A security holder of a corporation which is
aparty to the merger or consolidation
exchanges his securities in such corporation
solely for stock securities in another
corporation, a party to the merger or
consolidation.
4. If property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such a corporation, as a
result of such exchange said person gains
control of said corporation, provided that
stocks issued for services shall not be
considered as issued in return for property.

Q: What is merger or consolidation for purposes

of taxation?

A: Merger or consolidation means:

1. Ordinary merger or consolidation, or
2. The acquisition by one corporation of
all or substantially all the properties of
another corporation solely for stock
provided that:
a. A merger or consolidation must be
undertaken for a bona fide
business purpose and not solely
for the purpose of escaping the
burden of taxation.

b. In determining whether a bona

fide business purpose exists each
and every step of the transaction
shall be considered and the whole
transaction or series of

transactions shall be treated as a

single unit.
c. In determining whether the
property transferred constitutes a
substantial portion of the property
of the transferor, the term
property shall be taken to
include the cash assets of the
transferor.

Q: What is control for recognition of gain or

loss?

A: It means ownership of stocks in a corporation

possessing at least 51% of the total voting power
of all classes of stocks entitled to vote.

Q: What is wash sales?

A: It is a sale or other disposition of stock or

securities where substantially identical securities
are acquired or purchased within 61-day period,
beginning 30 days before the sale and ending 30
days after the sale.

Q: What may be the subject of wash sale?

A: It may be shares of stocks, securities, including

stock options.

Q: What is the significance in determining

whether a transaction is a wash sale or not?

A: If the transaction is a wash sale, the gain is

taxable and the loss is not deductible.

Note: Loss from wash sales is merely an artificial

loss and not actually sustained. The seller can
recover this loss through the subsequent sale of the
same. In effect, the loss can be recovered. So there

is really no loss incurred or sustained as it is a mere

artificial loss.

Q: How are losses from wash sales treated?

A:
GR: Losses from wash sales are not deductible.

XPN: When the sale was made by a dealer in

stock or securities and with respect to a
transaction made in the ordinary course of the
business of such dealer, losses from such sale
is deductible. (Sec. 38, NIRC)

Passive Income Subject to Final Tax

Q: Define

passive income.

A: Passive income refers to income derived from

any activity on which the taxpayer has no active
participation or involvement.

Q: What are the classifications of passive

income?

A: Passive income may either be:

1. Subject to scheduler rates, or
2. Subject to final tax.

Q: What is meant by income subject to final

tax? Give at least two examples of income of
resident individuals that is subject to the final
tax.

A: Income subject to final tax refers to an income

wherein the tax due is fully collected through the

withholding tax system. Under this procedure,
the payor of the income withholds the tax and
remits it to the government as a final settlement
of the income tax due on said income. The
recipient is no longer required to include the item
of income subjected to "final tax" as part of his
gross income in his income tax returns.

Examples of income subject to final tax are

dividend income, interest from bank deposits,
royalties. (2001 Bar Question)

Q: What are the passive incomes that are subject

to final tax under the NIRC?

A:
1. Certain passive income:
a. Interests, royalties, prizes and
other winnings
b. Cash and/or property
dividends
2. Capital gains from sale of shares of
stock not traded in the stock exchange
3. Capital gains from sales of real property
(Sec. 24, NIRC)

Q: What is a deposit substitute?

A: Under Sec. 22, (Y), deposit substitute shall

mean an alternative form of obtaining funds from
the public (20 or more lenders) other than
deposits.

Q: What is meant by Foreign Currency Deposit

System?

A: This shall refer to the conduct of banking

transactions whereby any person whether natural
or judicial may deposit foreign currencies forming
part of the Philippine international reserves, in

accordance with the provisions of RA 6426, An

Act Instituting a Foreign Currency Deposit System
in the Philippines, and for other purposes.

Q: What is the tax treatment of the following

interest on deposits with:
1. BPI Family Bank?
2. A local offshore banking unit of a foreign
bank?

A:
1. It is a passive income subject to a
withholding tax rate of 20%.
2. It is a passive income subject to final
withholding tax rate of 7.5%. (Sec. 24 B
[1], NIRC) Both interests are not to be
decalred as part of gross income in the
income tax return. (2005 Bar Question)

Q: Distinguish the 20% final withholding tax on

interest income from the 5% gross receipts tax
on banks.

A:

20% FWT on Interest

Income
5% Gross Receipts Tax on
Banks
It is an income tax
under Title II of the
NIRC (Tax on Income)
It is a percentage tax under
Title V (Other Percentage
Taxes)
FWT is imposed on the
net income or gross
income realized in a
taxable year
GRT is measured by a certain

percentage of the gross

selling price or gross value of
money of goods sold,
bartered or imported; or the
gross receipts or earnings
derived by any person
engaged in the sale of
services
FWT is subject to
withholding
GRT is not subject to
withholding

Q: Maribel, a retired public school teacher, relies

on her pension from the GSIS and the Interest
Income from a time deposit of P500,000 with
ABC Bank. Is Maribel liable to pay any tax on her
income?

A: Maribel is exempt from tax on the pension

from the GSIS (Sec. 28 b [7] F, NRC). However,
with her time deposit, the interest she receives
thereon is subject to 20% final withholding tax.

Q: Define dividend.

A: Dividend is any distribution made by a

corporation to its shareholders out of its earnings
or profits and payable to its shareholders,
whether in money or in other property.

Q: Is tax on income and dividends amount to

double taxation?

A: No, tax on income is different from tax on

dividend because they have different tax basis.
(Afisco Insurance Companies v. CA, GR 1123675,
Jan. 25, 1999)

Note: Where a corporation distributes all of its

assets in complete liquidation or dissolution, the
gain realized or loss sustained by the stockholders

whether individual or corporate, is a taxable income

or deductible loss, as the case may be. (Sec. 73 [A],
NIRC)

Q: When is the reckoning point in taxing the

dividend?

A: The reckoning point is the time of declaration

and not the time of payment of dividends as it is
taxable whether actually or constructively
received.

Q: Is the receipt of stock dividend taxable?

A:
GR: No, stock dividends, strictly speaking,
represent capital and do not constitute income
to its recipient. So that the mere issuance
thereof is not subject to income tax as they are
nothing but enrichment through increase in
value of capital investment.

XPNs:
1. These shares are later redeemed for
consideration by the corporation or
otherwise conveyed by the stockholder
to the extent of such corporation.
2. The recipient is other than the
shareholder.
3. If the stock dividend issuance resulted
in a change in the shareholders equity.
4. Stock dividends equivalent to cash or
property resulting in a change of
ownership and interest of the
shareholders. (Sec. 24 B [2]; 25 A, B; 28
B [5] b, NIRC)

Q: What are disguised dividends in income

taxation?

A: Disguised dividends are those income

payments made by a domestic corporation, which
is a subsidiary of a non-resident foreign

corporation, to the latter ostensibly for services

rendered by the latter to the former, but which
payments are disproportionately larger than the
actual value of the services rendered. In such
case, the amount over and above the true value

of the service rendered shall be treated as a

dividend, and shall be subjected to the
corresponding tax of 35% on Philippine sourced
gross income, or such other preferential rate as
may be provided under a corresponding Tax
Treaty.

E.g., Royalty payments under a corresponding

licensing agreement. (1994 Bar Question).
Q: Give the summary rules on the tax treatment of certain passive income as appl
ied to individuals.

A:

RC
NRC
RA
NRAETB
NRA NETB
Sources Of Income
Within
and
without
Within
Within
Within
Within
NATURE OF INCOME
TAX RATE
INTEREST
On interest on currency bank deposits, yield or other monetary
benefits from deposit substitutes, trust funds & similar
arrangements.

XPN:
If the depositor has an employee trust fund or accredited
retirement plan, such interest income, yield or other monetary
benefit is exempt from final withholding tax.

20%

20%

20%

20%

25%
Interest income under the Expanded Foreign Currency Deposit
System.

Note: If the loan is granted by a foreign government, or an

International or regional financing institution established by
governments, the interest income of the lender shall not be
subject to the final withholding tax.
7.5%
Exempt
7.5%
Exempt
Exempt
Interest Income from long-term deposit or investment in the form
of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates in such form prescribed by the BSP
Held for:
5 years or more

exempt

4 years to less than 5 years

5%

3 years to less than 4 years

12%

Less than 3 years

20%

25%
DIVIDEND
Dividend from a DC or from a joint stock company, insurance or
mutual fund company and regional operating headquarters of a
multinational company; or on the share of an individual in the
distributable net income after tax of partnership (except that of a
GPP) of which he is a partner, or on the share of an individual in
the net income after tax of an association, a joint account or joint
venture or consortium taxable as a corporation of which he is a
member of co-venturer.

10%

10%

10%

20%

25%
ROYALTY INCOME
Royalties on books, literary works and musical composition.
10%
10%
10%
10%
25%
Other royalties (e.g. patents and franchises)
20%
20%
20%
20%
25%
PRIZES AND WINNINGS
Prizes exceeding P10,000
20%
20%
20%
20%
25%
Winnings
20%
20%
20%
20%
25%
Winnings from Philippines Charity sweepstakes and lotto
winnings

Exempt
Exempt
Exempt
Exempt
Exempt

Note: For corporations, the tax rate is also 20% without any distinction as to r
oyalties. Thus, even books and other literary
works and musical compositions shall be subject to 20% tax.

Moreover, prizes and other winnings (except Philippine Charity Sweepstakes and L
otto winnings) of corporations are not
subject to final tax but included as part of their gross income.

Interests

Q: What is interest income?

A: It is the amount of compensation paid for the

use of money or forbearance from such use.

Q: How is interest income taxed?

A: Interest income is considered as passive income

subject to final tax.

Note: Tax rate is seen on the table provided.

Q: As a rule, interest income is taxable. What are

the exceptions?

A: Interest Income: [FIL2D]

1. On bank deposit maintained under the
expanded Foreign currency deposit.
2. On bonds, debentures, and other
certificate of Indebtedness received by
any of the above mentioned entities.
3. On Loans extended by any of the above
mentioned entities.
4. From Long term investment or deposit.
5. From bank Deposits. The recipient must
be any following tax exempts recipients:
a. Foreign government;
b. Financing institutions owned,
controlled or financed by foreign
government; or
c. Regional or international financing
institutions established by foreign
government. (Sec. 25 A [2], NIRC)

Note: In order to avail exemption under item no.

4, the recipient must be a non-resident alien or
non-resident foreign corporation. Otherwise, it is

subject to final tax of 7 %.

Item no. 5 applies only to individual taxpayers.

Q: What is the tax treatment of the following in

the preparation of annual income tax returns:
Interest on deposits with: (i) BPI Family Bank; and
(ii) a local offshore banking unit of a foreign bank.

A: Both items are excluded from the income tax

return: (i) Interest income from any currency bank
deposit is considered passive income from sources
within the Philippines and subject to final tax. Since
it is subject to final tax it is not included in the
annual ITR. (Sec. 24 B [1], NIRC) (ii) Same as No. (i)
(2005 Bar Question)

Dividend Income

Q: What is dividend income?

A: Dividend income is a corporate profit set aside,

declared and distributed by the board of director of
a corporation to be paid to stockholders on
demand or at a fixed time.

Q: How is dividend income taxed?

A: Dividend income is considered as passive

income subject to final tax.

Note: Tax rate is seen on the table provided.

Q: Are stock dividends taxable?

A:
GR: No, stock dividends are considered
unrealized gain since there is a mere transfer of
surplus to the capital account. Thus, it is not
subject to income tax until that gain has been
realized.

A stock dividend, when declared is merely a

certificate of stock which shows the interest of
the stockholder in the increased capital of the
corporation.

XPN: A stock dividend constitutes taxable

income if it gives the shareholder a higher
interest compared with what his former
stockholdings represented.

Note: A stock dividend does not constitute taxable

income if the new shares did not confer new rights
nor interests than those previously existing, and
that the recipient owns the same proportionate
interest in the net assets of the corporation (Sec.
252, RR No. 2)

Q: Fred, was a stockholder in the Philippine

American Drug Company. Said corporation
declared a stock dividend and that a proportionate
share of stock dividend was issued to the Fred. The
CIR, demanded payment of income tax on the
aforesaid dividends. Fred protested the
assessment made against him and claimed that
the stock dividends in question are not income but
are capital and are, therefore, not subject to tax.
Are stock dividends income?

A: No, stock dividends are not income and are

therefore not taxable as such. A stock dividend,
when declared, is merely a certificate of stock
which evidences the interest of the stockholder in
the increased capital of the corporation. A
declaration of stock dividend by a corporation

involves no disbursement to the stockholder of

accumulated earnings and the corporation parts
with nothing to its stockholder. The property
represented by a stock dividend is still that of the
corporation and not of the stockholder. The
stockholder has received nothing but a
representation of an interest in the property of the
corporation and as a matter of fact, he may never
receive anything, depending upon the final
outcome of the business of the corporation. (Fisher
v. Trinidad, GR L-21186, Feb. 27, 1924)

Q: Suppose the creditor is a corporation and the

debtor is its stockholder, what is the tax
implication in case the debt is condoned by the
corporation?

A: This may take the form of indirect distribution of

dividends by a corporation. On the part of the
stockholder whose indebtedness has been
condoned he is subject to 10% final tax, on the
masked dividend payment. On the part of the
corporation, said amount cannot be claimed as
deduction. When the corporation declares
dividends, it can be considered as interest on
capital therefore not deductible.

Q: Is the redemption of stocks of a corporation

from its stockholders as well as the exchange of
common with preferred shares considered as
essentially equivalent to the distribution of
taxable dividend" making the proceeds thereof
taxable?

A: Yes, the general rule states that a stock dividend

representing the transfer of surplus to capital
account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to
make the distribution and cancellation or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or
cancellation of the stock shall be considered as
taxable income to the extent it represents a
distribution of earnings or profits accumulated.

The redemption converts into money the stock

dividends which becomes a realized profit or gain

and consequently, the stockholder's separate

property. Profits derived from the capital invested
cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the
existence of any business purpose for the
redemption (CIR v. CA, GR 108576, Jan. 20, 1999)

Q: What are the dividends exempt from taxation?

A:
1. Those earned before Jan. 1, 1998
2. Dividends received by a DC from another
DC
3. Dividends received by a RFC from a DC
4. A stock dividend representing the transfer
of surplus to capital account
5. Dividends received by a NRFC from a DC,
although subject to withholding tax
because foreign taxes paid on such
dividends are allowed as a tax credit

Q: What is the tax treatment of cash or property

dividend?

A: The cash or property dividend received by an

individual from a DC is subject to a final tax of 10%.

Q: What are property dividends?

A: Property dividends are those paid in corporate

property such as bonds, securities or stock
investments held by the corporation. They are
taxable to the extent of the fair market value of the
property received at the time of distribution.

Q: What is Liquidating Dividend?

A: Return of investment to the stockholders by a

dissolving corporation upon its asset distribution.
Where a corporation distributes all of its assets in
complete liquidation or dissolution, the gain

realized or loss sustained by the stockholder,

whether individual or corporate, is a taxable income
or a deductible loss.

Note: Gains are subject to Income Tax under Sec. 24,

NIRC. Only 50% of the aforementioned capital gain is
reportable for Income Tax purposes if the shares were
held by the individual stockholders for more than 12
months, and 100% of the capital gains if the shares
were held for less than 12 months. If the stockholders
sell the asset received by them as liquidating dividends
immediately after title thereto is transferred to their
names and after the lease thereon shall have been
terminated, the stockholders shall be subject to the 6%
CGT based on the gross selling price or the FMV,
whichever is higher.

Royalty Income

Q: What are royalties?

A: Royalties are sums of money paid to a creator or

a participant in an artistic work, based on individual
sales of the work. In order to receive royalties, the
work must generally have a copyright or patent.

Q: Distinguish rent from royalty.

A:
RENT
ROYALTY
As to reporting
Must be reported as
part of gross income
Need not be reported since
subject to final tax.
As to tax rate
Regular progressive tax
if individual
Final tax

Rents

Q: What is rental income and what is its scope?

A: Rental income is a fixed sum, either in cash or in

property equivalent, to be paid at a definite period
for the use or enjoyment of a thing or right.

All rentals derived from lease of real estate or

personal property, of copyrights, trademarks,
patents and natural resources under lease.

Q: When is prepaid rent taxable?

A: Prepaid or advance rental is taxable income to

the lessor in the year received, if received under a

claim of right and without restriction as to its use,

regardless of method of accounting employed.

Note: Security deposit applied to the rental of terminal

month or period of contract must be recognized as
income at the time it is applied. Security deposit is to
ensure contract compliance, it is not income to the
lessor until the lessee violates any provision of the
contract.

Q: What rent is subject to special rate?

A:
1. Those paid to non-resident owner or
lessor of vessels chartered by Philippine
national
4.5% of gross rentals (Sec. 28 B
[3], NIRC)
2. Those paid to non-resident owner or
lessor of aircraft, machineries and other
equipment
7.5% of gross rental or fees.
(Sec. 28 B [4], NIRC)

Q: What are those items that are likewise

considered as additional rent income?

A: Additional rent income may be grouped into 2:

1. Obligations of Lessors to 3rd parties
assumed by the lessee:
a. Real estate taxes on leased premises
b. Insurance premiums paid by lessee
on property
c. Dividends paid by lessee to stockholders of lessor-corporation
d. Interest paid by lessee to holder of
bonds issued by lessor-corporation

2. Value of permanent improvement made

by lessee on leased property of the lessor
upon expiration of the lease.

Q: What are the recognized methods in reporting

the value of permanent improvement?

A:
1. Outright Method - the fair market value of
the building or improvement shall be
reported as additional rent income;
2. Spread Out Method
allocate the
depreciated value over the remaining
term of the lease contract. Every year, an
aliquot part of the depreciated value
should be reported as additional rent in
addition to the regular rent income.

Note: With the outright method it would only be

counted for 1 rental payment unlike with the
spread out method it would be distributed to the
remaining term of the lease contract.

Q: What is the tax treatment of VAT added to

rental/paid by the lessee?

A: Any additional amount paid, directly or indirectly,

by the lessee in consideration for the lease is
considered rental. Therefore, taxes paid by the lessee
on leased property are part of rental income of the
landlord.

Annuities

Q: What is an annuity?

A: It refers to the periodic installment payments of

income or pension by insurance companies during
the life of a person or for a guaranteed fixed period
of time, whichever is longer, in consideration of
capital paid by him.

The portion representing return of premium is not

taxable while that portion that represents interest

is taxable.

Note: Annuities are part of the gross income.

Prizes and Winnings

Q: What is the meaning of prizes and winnings for

the purposes of income taxation?

A: It refers to amount of money in cash or in kind

received by chance or through luck and are
generally taxable except if specifically mentioned
under the exclusion from computation of gross
income under Sec. 32[B] of NIRC.

Q: What prizes and winning are subject to

Philippine income tax?

A:
1. Prizes derived from sources within the
Philippines not exceeding P10,000 is
included in the gross income; if over
P10,000, it is subject to final tax on
passive income.
2. Winning from sources within is subject to
final tax on passive income except PCSO
and lotto winnings which are tax exempt;
3. Prizes and winnings from sources outside
the Philippines.

Pensions

Q: What is pension?

A: It refers to amount of money received in lump

sum or on staggered basis in consideration of
services rendered given after an individual reaches
the age of retirement.

Q: When is pension taxable?

A: Pension being part of gross income is taxable to

the extent of the amount received except if there is
a BIR approved pension plan. (Sec. 32 B [6], NIRC)

Partner s Distributive Share in the Net Income

of General Professional Partnership

Q: Is the income of GPP taxable?

A: GPP is not taxable as an entity but the partner s

share in the net income of GPP is included in his
gross income.

Q: How do we compute the distributive share of

each partner in the net income of a GPP?

A: For purposes of computing the distributive share

of each partner, the net income of the partnership
shall be computed in the same manner as a
corporation. (Sec. 26, NIRC)

Each partner shall report as gross income in his

return, his distributive share in the net income of
the GPP, whether actually or constructively
received.

Q: Suppose the result of GGP operation is a loss?

A: The loss will be divided as agreed upon by the

partners, which may be taken by the individual
partners in their respective returns.

Income from any Source Whatever

Q: What are examples of income from any source

whatever?

A:
1. Forgiveness of indebtedness
2. Recovery of accounts previously written
off
3. Receipt of tax refunds or credit

Q: What is the general rule on taxation of debts?

A: Borrowed money is not part of taxable income

because it has to be repaid by the debtor. On the
other hand, the creditor does not receive any
income upon payment because it is merely a return
of the investment.

Q: What is the tax treatment of forgiveness of

indebtedness?

A:
1. When cancellation of debt is income. If an
individual performs services for a creditor,
who in consideration thereof, cancels the
debt, it is income to the extent of the
amount realized by the debtor as
compensation for his services.
2. When cancellation of debt is a gift. If a
creditor merely desires to benefit a debtor
and without any consideration therefore
cancels the amount of the debt, it is a gift
from the creditor to the debtor and need
not be included in the latter s income.
3. When cancellation of debt is a capital
transaction. If a corporation to which a
stockholder is indebted forgives the debt,
the transaction has the effect of payment of
a dividend. (Sec. 50, RR No. 2)

4. An insolvent debtor does not realize taxable

income from the cancellation or
forgiveness. (CIR v. Gin Co.)
5. The insolvent debtor realizes income
resulting from the cancellation or
forgiveness of indebtedness when he
becomes solvent. (Lakeland Grocery Co. v.
CIR 36 BTA 289 [1937])

Q: What is the situs of income taxation?

A: Individual Income Taxation:

1. Residence
RA, RC
2. Place NRA, NRC
3. Citizenship
RC

Corporate Income Taxation:

1. Residence RFC
2. Place NRFC
3. Nationality
DC

EXCLUSIONS FROM GROSS INCOME

Q: What are exclusions from gross income?

A: Exclusions from gross income refer to the

removal of otherwise taxable items from the reach
of taxation either because they:
1. Represent return of capital;
2. Are not income, gain or profit;
3. Are subject to another kind of internal
revenue tax;
4. Are income, gain or profit that are
expressly exempt from income tax under
the Constitution, Tax treaty, Tax Code, or
general or a special law.

Note: Exclusions are not subject to tax because of

policy considerations such as:
1. To avoid the effects of double taxation
2. To provide incentives for certain socially
desirable activities
Q: Who may avail of the exclusions?

A: All kinds of taxpayers

individuals, estates,
trusts and corporations, whether citizens, aliens,
whether residents or non-residents may avail of
the exclusions.

Q: Define exemption.

A: It refers to an immunity or privilege, freedom

from charge or burden to which other persons are
subject to tax.

Q: How are exclusions and exemptions construed?

A: Exclusions and exemptions must be strictly

construed against the taxpayer and liberally in
favor of the Government.

Q: Distinguish Exclusion from Gross Income

from Deductions from Gross Income .

A:
Exclusion from
Gross Income
Deduction from
Gross Income
Refer to a flow of wealth to the
taxpayer which are not treated
as part of gross income, for
purposes of computing the
taxpayer s taxable income, due
to the following reasons:

1. It is exempted by the
fundamental law
2. It is exempted by statute
3. It does not come within the
definition of income (Sec. 61,
RR No. 2)
The amounts,
which the law
allows to be
deducted from
gross income in
order to arrive at
net income
Pertains to the computation of
gross income
Pertains to the
computation of
net income
Something received or earned
by the taxpayer which do not
form part of gross income
Something spent
or paid in
earning gross
income
Example of an exclusion from
gross income is proceeds of life
insurance received by the
beneficiary upon the death of
the insured which is not an
income or 13th month pay of an
employee not exceeding
P30,000 which is an income not
recognized for tax purposes
Example of a
deduction is
business rental

Under the Constitution

Income Derived by the Government

or its Political Subdivision

Q: Is the income derived by the Government or its

political subdivision exempt from gross income?

A: Yes, if the source of the income is from any

public utility or from the exercise of any essential
governmental functions.

Q: Are GOCCs exempt from tax?

A: GOCCs performing:
1. Governmental Function:

GR: Government agencies performing

governmental functions are tax exempt.

XPN: Unless expressly taxed while

government agencies performing
proprietary functions are taxable

XPN to XPN: Unless expressly exempted.

2. Proprietary Functions: subject to taxation.

Note: Under Sec. 27 (c) of RA 8424 the following

corporations have been granted exemptions:
1.
2.
3.
4.

Government Service Insurance System

Social Security System
Philippine Health Insurance Corporation
Philippines Charity Sweepstakes Office

Under the NIRC

Q: What are those items that are excluded in gross

income and shall be exempt from gross income
taxation?

A: These are: [GLAM-RIC]

1. Gifts, bequests and devises
2. Life insurance proceeds
3. Amount received by insured as return of
premium
4. Retirement benefits, pensions, gratuities,
etc.
5. Income exempt under treaty
6. Compensation for injuries or sickness
7. Miscellaneous items. (13P2I2G3)
a. 13thmonth pay and other Benefits;
b. Prizes and awards
c. Prizes and awards in sports
competitions

d. Income derived by foreign

government
e. Income derived by the government
or its political subdivisions
f. GSIS, SSS, Medicare and other
contributions
g. Gains from the sale of bonds,
debentures or other certificate of
indebtedness
h. Gains from redemption of shares in
mutual fund (Sec. 32 [B],NIRC)

Life Insurance

Q: What is life insurance?

A: Life insurance is insurance on human life and

insurance appertaining thereto or connected
therewith. (Sec. 179, Insurance Code)

Q: What are the conditions for the exclusion of life

insurance proceeds from gross income?

A: ProHeDS
1.
2.
3.
4.

Proceeds of life insurance policies;

Paid to the Heirs or beneficiaries;
Upon the Death of the insured;
Whether in a single Sum or otherwise.

Note: It merely represents an indemnification for the

loss of life and not a gain or profit. It has been ruled
that the amount received shall be excluded in the
computation of gross income if the accident or health
insurance has the characteristic of a life insurance
policy.

Q: Is the rule that the amount of the proceeds of

life insurance excluded from the gross income
absolute?

A: No. The exceptions are: [ASV-PPC]

1. If there is an Agreement between the
insured and the insurer to the effect that
the amount shall be withheld by the
insurer under an agreement to pay
interest thereon, the interest held by the
insurer pursuant to that agreement is the
one taxable but not the principal amount
(Sec. 32 B [1], NIRC)
2. Where the life insurance policy is used to
Secure a money obligation
3. Where the life insurance policy was
transferred for a Valuable consideration
4. The recipient of the insurance proceeds is
a business Partner of the deceased and
the insurance was taken to compensate
the partner-beneficiary for any loss in
income that may result as the death of
the insured partner
5. The recipient of the insurance proceeds is
a Partnership in which the insured is a
partner and the insurance was taken to
compensate the partnership for any loss
in income that may result from the
dissolution of the partnership caused by
the death of the insured partner
6. The recipient of the life insurance
proceeds is a Corporation in which the
insured was an employee or officer. (Sec.
62, RR No. 2)

Q: Who may be the recipient of the life insurance

policy proceeds?

A: The designation of the beneficiary is immaterial

provided he is not disqualified to be a beneficiary
under the law for purposes of exclusions from gross
income.

Q: When is the designation or name of the

beneficiary material?

A: It is material in determining whether the amount

shall form part of the gross estate of the decedent.

Q: Suppose the employer insures the life of his

employee and the one paying the premiums on
that life insurance policy is the employer. If the
employee dies:
1. Are the proceeds of the life insurance policy
excluded from the gross income?
2. Will the proceeds form part of the estate of
the decedent and therefore subject to estate
tax?
3. Assuming the designation of the 3rd person in
the policy is silent whether his designation is
revocable or irrevocable, what is the rule?

A:
1. Yes, the manner of designation or the
name of the beneficiary is immaterial. The
amount of the proceeds is excluded from
the gross income.

2. It depends.

If the heirs, estate, administrator or

executor is designated as beneficiary, the
proceeds form part of the estate whether
the designation is revocable or
irrevocable.

If the person designated is a 3rd person

(which includes the employer,) the
proceeds form part of the estate if the
designation is revocable. If the
designation is irrevocable, the proceeds
will not be included in the gross estate.

3. It shall be considered as revocably

designated. Under Sec. 11 of the

Insurance Code of the Philippines, the

insured has the right to change the
beneficiary he designated in the policy,
unless he has expressly waived this right
in said policy. If the policy is silent, the
general rule that the designation is
revocable shall apply. There is only
irrevocable designation if the policy
expressly provides.

Q: Noel is a bright computer science graduate. He

was hired by HP. To entice him to accept the the
job, he was offered the arrangement that part of
his compensation package would be an insurance
policy with a face value of P20 million. The parents
of Noel are made the beneficiaries of the
insurance policy. Will the proceeds of the
insurance form part of the income of the parents
of Noel and be subject to income tax?

A: No, the proceeds of life insurance policies are

paid to the heirs or beneficiaries upon the death of
the insured are not included as part of the gross
income of the recipient. There is no income realized
because nothing flows to Noel s parents other than
a mere return of capital, the capital being the life of
the insured. (2007 Bar Question)

Amount Received by Insured.

As Return of Premium

Q: What are the conditions for its exclusion from

gross income?

A:
1. Amount received by insured;
2. As a return of premium paid by him;
3. Under a life insurance, endowment or
annuity contract;
4. Either :
a. During the term; or
b. At the maturity of the term
mentioned in the contract; or
c. Upon surrender of the contract.

Note: The amount returned is not income but

mere return of capital.

Endowment

Q. Define endowment.

A: The insurer agrees to pay a sum certain to the

insured if he outlives a designated period. If he dies
before that date, the proceeds are to be paid to the
designated beneficiary.

Q: What is the tax treatment of proceeds received

under endowment policies?

A: If the insured dies, and the beneficiary receives

the life insurance proceeds, these are not taxable
income because they are excluded from gross
income.

If the insured does not die and survives the

designated period, the amount pertaining to the
premiums he paid are excluded from gross income,
but the excess shall be considered part of his gross
income.

Q: Suppose Al obtained an endowment policy

valued at P1 million. He paid premiums amounting

to P800,000. Upon maturity, he received P1

million, what amount is taxable?

A: The amount of P200,000 is taxable. The

difference between the value of the insurance and
the actual premiums paid forms part of Al s gross
income.

Q: Mario worked his way through college. After

working for more than 2 years in X Corporation,
Mario decided to retire and avail of the benefits
under the very reasonable retirement plan
maintained by his employer. On the day of his
retirement on Apr. 30, 1985, he received his
endowment insurance policy, for which he was
paying an annual premium of P1,520 since 1965,
also matured. He was then paid the face value of
his insurance policy in the amount of P50,000. Is
his P50,000 insurance proceeds exempt from
income taxation?

A: The P50,000 insurance proceeds is not totally

exempt from income tax. The excluded amount is
that portion which corresponds to the premiums
that he had paid since 1965. At the rate of P1,520
per year multiplied by twenty (20) years which was
the period of the policy, he must have paid a total
of P30,400. (P1,520 x 20 years). Accordingly, he wil
be subject to report as taxable income the amount
of P19,600. (Sec. 28, NIRC)

Gifts, Bequests and Devises

Q: What gratuitous transfers are excluded from

gross income?

A: The value of property acquired by gift, bequest

or devise is excluded from gross income. The
income from said property, however, is included as
part of gross income and is subject to tax.

Note: The consideration is based on pure liberality and

is already subject to donor s or estate tax as the case

may be. Moreover, there is no income.

Q: What is a gift?

A: A gift is any transfer not in the ordinary course of

business which is not made for full and adequate
consideration in money or money s worth. The
giver is called the donor and the recipient is called
the donee.

Q: If Mr. Generous gave a gift to Ms. Gorgeous

what are the tax implications?

A: Mr. Generous, the donor is subject to donor s tax

while Ms. Gorgeous the donee is not subject to
donee s tax. Donee s tax has been abolished by PD
69. The value of the gift received by Ms. Gorgeous
is not included in the computation of gross income
pursuant to Sec. 32 B (3), NIRC, gifts, bequest and
devises are excluded from gross income.

Q: What is a Bequest and a Devise?

A: Bequest is a gift of personal

is a gift of real property. Both
causa. The giver is either known
decedent while the recipient may
beneficiary/ies.

property and devise

are donations mortis
as the testator or
be the heirs or

Q: What are the tax implications of a Bequest and

Device?

A: The estate of the testator or the decedent is

subject to estate tax, while the heirs or
beneficiary/ies are not required to pay donee s tax
as the same was already abolished. The value of the
bequest and/or the devise received by the heirs or
beneficiary/ies is not included in the computation
of their gross income since gifts, bequest and
devises are excluded from gross income. (Sec. 32
[B], NIRC)

Q: Is donation inter vivos and mortis causa subject

to income tax?

A: Whether the donation is inter vivos or mortis

causa, it is excluded from gross income for it is not
product of capital nor industry. Furthermore, the
property is already subject to donor s or estate
taxes as the case may be.

Q: What is the Gift Tax Test ?

A: When a person gives a thing or right to another

and it is not a legally demandable obligation then
it is treated as a gift and excluded from gross
income. However, if there is a legally demandable
obligation to give such as for services rendered by
one to the donor or due to his merits, the amount
received is taxable income to the recipient.

Q: Quiroz worked as chief accountant of a hospital

for 45 years. When he retired at 65 he received
retirement pay equivalent to 2 months' salary for
every year of service as provided in the hospital
BIR approved retirement plan. The Board of
Directors of the hospital felt that the hospital
should give Quiroz more than what was provided
for in the hospital's retirement plan in view of his
loyalty and invaluable services for 45 years. Hence,
it resolved to pay him a gratuity of P1 million over
and above his retirement pay.

The CIR taxed the P1 million as part of the gross

compensation income of Quiroz who protested
that it was excluded from income because (a) it
was a retirement pay, and (b) it was a gift.

Is Quiroz correct in claiming that the additional P1

Million was gift and therefore excluded from
income?

A: No, the amount received was in consideration of

his loyalty and invaluable services to the company
which is clearly a compensation income received on
account of employment. Under the employer's
'motivation test,' emphasis should be placed on the
value of Quiroz services to the company as the
compelling reason for giving him the gratuity, hence
it should constitute a taxable income. The payment
would only qualify as a gift if there is nothing but
'good will, esteem and kindness' which motivated
the employer to give the gratuity. (Stonton v. U.S.,
186 F. Supp. 393)

Compensation for Injuries or Sickness

Q: What are the kinds of compensation for injuries

or sickness that may be excluded from gross
income?

A:
1. Amounts received through Accident or
Health Insurance or Workmen s
Compensation Act as compensation for
personal injuries or sickness
2. Amounts of any damages received whether
by suit or agreement on account of such
injuries or sickness. (Sec. 32 B [4], NIRC)

Note: They are mere compensation for injuries or

sickness suffered and not income. It is intended to
make the injured party whole as before the injury.

Q: JR was a passenger of an airline that crashed.

He survived the accident but sustained serious
physical injuries which required hospitalization for
3 months. Following negotiations with the airline
and its insurer, an agreement was reached under
the terms of which JR was paid the following
amounts: P500,000 for his hospitalization;
P250,000 as moral damages; P300,000 for loss of
income during the period of his treatment and
recuperation. In addition, JR received from his
employer the amount of P200,000 representing
the cash equivalent of his earned vacation and sick
leaves. Which if any, of the amounts are subject to
income tax?

A: The amount of P200,000 that JR received from

his employer is subject to income tax, except the
money equivalent of 10 days unutilized vacation
leave credits which is not taxable. Amounts of
vacation allowances or sick leave credits which are
paid to an employee constitute compensation. (Sec.
2.78 A [7], RR 2-98, as amended by RR 10-2000)

The amounts that JR received from the airline are

excluded from gross income and not subject to
income tax because they are compensation for
personal injuries suffered from an accident as well
as damages received as a result of an agreement on
account of such injuries. (Sec. 32 B [4], NIRC) (2005
Bar Question)

Income Exempt Under Treaty

Q: What are income exempt under treaty?

A: Income of any kind, to the extent required by

any treaty obligation binding upon the Government
of the Philippines. (Sec. 32 B [5], NIRC)
Note: Public policy recognizes the principles of
reciprocity and comity among nations.

Retirement Benefits, Pensions,,Gratuities, Etc.

Q: What are the retirement benefits, pensions,

gratuities, etc. excluded from gross income?

A: 7FRUGS2
1. Retirement benefits under RA 7641
2. Social security benefits, retirement
gratuities, pensions and other similar
benefits received by resident or nonresident citizens or resident alien from
Foreign government agencies and other
institutions, private or public
3. Retirement received by officials and
employees of private firms, whether
individual or corporate, in accordance
with a Reasonable private benefit plan
maintained by the employer
4. Benefits from the US Veterans
Administration
5. GSIS benefits
6. SSS
7. Separation pay

Q: What are the salient features of RA 7641,

amending the Labor Code with regards to the
retirement pay of qualified employees in the
absence of any retirement plan?

A:
1. Where the retirement plan is established
in the CBA or other applicable
employment contract - Any employee
may be retired upon reaching the
retirement age established in the CBA or
other applicable employment contract.

In case of retirement, the employee shall

be entitled to receive such retirement
benefits as he may have earned under
existing laws and any CBA and other
agreements: Provided, however, that an
employee's retirement benefits under any
collective bargaining and other
agreements shall not be less than those
provided by the law.

2. In the absence of a retirement plan or

agreement providing for retirement
benefits of employees in the
establishment
a. Optional

the conditions are:

i. An employee upon reaching the

age of 60 years or more;
ii. Who has served at least 5 years
in the said establishment;
iii. May retire and shall be entitled
to retirement pay equivalent to
month salary for every year of
service, a fraction of at least 6
months being considered as one
whole year.
b. Mandatory

the conditions are:

i. An employee upon reaching the

age of beyond 65 years which is
the compulsory retirement age;
ii. Who has served at least 5 years
in the said establishment;
iii. May retire and shall be entitled
to retirement pay equivalent to
month salary for every year of
service, a fraction of at least 6
months being considered as one

whole year. (RA 7641,

Retirement Pay Law)

Q: What is a Reasonable Private Benefit Plan

(RPBP)?

A: Pension, gratuity, stock bonus or profit-sharing

plan maintained by an employer for the benefit of
some or all his officials or employees, wherein
contributions are made by such employer for the
officials or employees, or both, for the purpose of
distributing the earnings and principal of the fund
thus accumulated, any part of which shall not be
used or diverted to any purpose other than for the
exclusive benefit of the said officials and
employees. (Sec. 32 B [6] a, NIRC)

Q: What are the conditions in order to avail the

exemption under a RPBP?

A: Reasonble-10-50-once
1. There must be Reasonable private benefit
plan approved by the BIR;
2. He must have rendered at least 10 years
of service to the employer at the time of
retirement; and
3. The private employee or official must be
at least 50 years old at the time of his
retirement;
4. This may be availed of only once.

Q: Are retirement benefits paid by an employer

which does not have a private benefit plan but has
an existing CBA providing for retirement benefits
of employees excluded from income tax?

A: Yes, provided that the minimum age

requirement and the length of service prerequisite
are met. Sec. 32 B [6] A of the NIRC provides for
two conditions in order for retirement benefits to
be exempt from income tax and, consequently,
from withholding tax: the retiring employee (1) has
been in the service of the same employer for at
least 10 years; and (2) is not less than 50 years of
age at the time of his retirement. On the other
hand, under RA 7641, the actual retirement age

may even be lower than 50 years of age, but since

the CBA or other applicable employment contract is
deemed the law between the parties, the agreed
age of retirement shall become the basis in
determining the taxability of retirement benefits of
retiring employees. Thus, for purposes of
determining the taxability of retirement benefits
received by retiring employees, the retirement age
is that age established in the CBA or other
applicable employment contract. However, if the
CBA or other applicable employment contract does
not provide for a retirement age, the minimum
requirement of 50 years provided for under Section
32 B [6] a, of the 1997 NIRC, as amended, shall
apply in order to qualify for the exemption granted
therein. (BIR Ruling No. SB [041] 603-2009, Sept. 22,
2009).

Q: Mel received from his first employer, P20,000

as retirement benefit and was subsequently
employed by another employer. After rendering
10 years, Mel retired from his second employer
and received P50,000. Payment was made under a
BIR approved retirement plan. Is the said amount
taxable or not?

A: Yes, it is taxable because the benefit of

exemption can only be availed of once.

Q: If the second employer is a Government entity

(assuming Mel was employed by the DPWH,)
would your answer be the same?

A: No, according to RA 8291 (The GSIS Act of 1997)

all benefits he received are tax exempt, including
retirement gratuity.

Q: Mario worked his way through college. After

working for more than 2 years in X Corporation,
Mario decided to retire and avail of the benefits
under the very reasonable retirement plan
maintained by his employer. On his retirement, he
received P400,000 as retirement benefit. Is
Mario s P400,000 retirement benefit subject to
income tax?

A: Mario s 400,000 retirement benefit is subject to

income tax. To be exempt, the retirement pay must
have been extended to an employee who is at least
10 years with the employer. The amount cannot be
considered as separation pay that would have
exempted benefits from income tax since it was
Mario who had decided to retire instead of being
required to do so.

Q: What are the conditions in order that

separation pay may be excluded from gross
income?

A:
1. Amount received by an official, employee
or by his heirs;
2. From the employer; and
3. As a consequence of separation of such
official or employee from the service of
the employer:
a. Because of death, sickness or other
physical disability; or
b. For any cause beyond the control of
the official or employee. (Sec 32 B [6]
b, NIRC)

Q: What are causes beyond the control of the

employee?

A:
1. Retrenchment
2. Cessation of business
3. Redundancy (Sec. 2 b [2], RR 2-98)

Q: Who will be the recipient of separation pay if

the cause of separation is death, physical disability
or sickness?

A:
1. In case of death, the estate unless there is
a designated beneficiary.
2. In case of physical disability or sickness,
the employee is the recipient of the
separation pay.

Q: State the tax treatment for separation pay.

A: Separation pay is not taxable irrespective of the

age of the employee, length of service, number of
benefits received or the recipient thereof. (Sec. 32 B
[6] b, NIRC)

Q: What is terminal leave pay?

A: Terminal Leave Pay is the amount received

arising from the accumulation of sick leave or
vacation leave credits. (Commutation of leave
credits)

Q: Is terminal pay excluded from gross income?

A: Yes, because it is received on account of a cause

beyond the control of the employee, that is,
compulsory retirement benefit.

It is applied for by an employee who is no longer

working, it is no longer compensation for services
rendered, hence not subject to income tax.

Q: Assuming it does not form part of the terminal

leave pay, as when it is given annually to the
employee, wherein the vacation or sick leave may
be converted into cash. What is the tax treatment
of the cash equivalent of such vacation leave
credits?

A: It depends.
1. For private employees
vacation leaves
are exempt from tax up to 10 days while
sick leaves are always taxable.
2. For government employees
both
vacation and sick leaves are tax exempt
irrespective of the number of days.

Q: What is the tax treatment of sick leave credits?

A: They are taxable irrespective of the number of

days. This applies if the sick or vacation leave
credits do not form part of the compulsory
retirement benefit.

Q: Bernardo, a retired employee of the SC filed a

request with the SC for the refund of the amount
of P59,502 which were deducted from his terminal
leave pay as withholding tax. The Court said that
the terminal leave pay of Bernardo, which he

received by virtue of his compulsory retirement,

can never be considered as part of his salary
subject to income tax. Hence, Bernardo s request
was granted. Is terminal leave pay subject to
income tax?

A: No, since terminal leave pay is applied for by an

officer or employee who has already severed his
connection with his employer and who is no longer
working, it necessarily follows that the terminal
leave pay or its cash equivalent is no longer
compensation for services rendered. Therefore, it
cannot be received by the said employee as salary.
It is one of those excluded from gross income and is
therefore not subject to tax. (Re: Request of Atty.
Bernardo Zialcita, AM 90-6-015-SC, Oct. 18, 1990)

Q: Jacobo worked for a manufacturing firm. Due to

business reverses the firm offered voluntary
redundancy program to reduce overhead
expenses. Under the program an employee who
offered to resign would be given separation pay
equivalent to his 3 month's basic salary for every
year of service. Jacobo accepted the offer and
received P400.000 as separation pay under the
program

After all the employees who accepted the offer

were paid, the firm found its overhead is still
excessive. Hence it adopted another redundancy
program. Various unprofitable departments were
closed. As a result, Kintanar was separated from
the service. He also received P400,000 as
separation pay.

1. Did Jacobo derive income when he received

his separation pay?
2. Did Kintanar derive income when he received
his separation pay?

A:
1. Yes, because his separation from
employment was voluntary on his part in
view of his offer to resign. What is
excluded from gross income is any
amount received by an official or
employee as a consequence of separation

of such official or employee from the

service of the employer for any cause
beyond the control of the said official or
employee. (Sec 28, NIRC)

2. No, because his separation from

employment is due to causes beyond his
control. The separation was involuntary
as it was a consequence of the closure of
various unprofitable departments
pursuant to the redundancy program.
(1995 Bar Question)

Q: Z, a Filipino immigrant living in the United

States for more than 10 years. He is retired and
came back to the Philippines a balikbayan. Every
time he comes to the Philippines, he stays here for
about a month. He regularly receives a pension
from his former employer in the United States,
amounting US$1,000 a month.

Does the US$1,000 pension become taxable

because he is now residing in the Philippines?

A: No, the law provides that pensions received by

resident or non-resident citizens of the Philippines
from foreign government agencies and other
institutions, private or public, are excluded from
gross income. (Sec. 32 B [6] c, NIRC) (2007 Bar
Question)

Miscellaneous Items

Q: What are the miscellaneous items excluded

from gross income?

A: 13P2I2G3
1.
2.
3.
4.

13th month pay and other Benefits

Prizes and awards
Prizes and awards in sports competitions;
Income derived by foreign government

5. Income derived by the government or its

political subdivisions
6. GSIS, SSS, Medicare and other
contributions
7. Gains from the sale of bonds, debentures
or other certificate of indebtedness
8. Gains from redemption of shares in
mutual fund. (Sec 32 [B], NIRC)

Income Derived by Foreign Government

Q: What are the conditions in order for the income

derived by foreign government from investments
in the Philippines be exempted from tax?

A:
1. It must be an income derived from
investments in the Philippines;
2. It must be derived from BOnds, Loans or
other Domestic securities, Stocks or
Interests on deposits in banks; [BOLDSI]
and
3. The recipient of such income from
investment in the Philippines must be a:
a. foreign government;

b. financing institutions owned,

controlled or financed by foreign
government; or
c. regional or international financing
institutions established by foreign
government. (Sec. 32 B [7], NIRC)

Note: The exclusion may be premised either on

the principle of comity or upon the principle of
reciprocity.

Prizes and Awards

Q: What are the requisites in order for prizes and

awards made be exempted from tax?
A:
1. Primarily in recognition of Scientific, Civic,
Artistic, Religious, Educational, Literary,
or Charitable achievement [SCAR-CEL]
2. The recipient was selected without any
action on his part to join; and
3. He is not required to render substantial
future services as condition to receiving
the prize or award.

Q: JM, received a prize of P100,000 for winning the

on-the-spot peace poster contest sponsored by
the Lions Club. Is the award included in the gross
income of JM for tax purposes?

A: No, it is not included. It is subject to a final tax of

20% for the amount is in excess of P10,000,
otherwise it would be included in his gross income
and subjected to a scheduler rate (Sec. 24 B [1],
NIRC) (2000 Bar Question)

Note: The prize constitutes a taxable income for it was

made primarily in recognition of his artistic
achievement which he won due to an action on his

part to enter the contest. (Sec. 32 B [7] c, NIRC)

Q: Q won P2,500 as part of the Palanca Award for

an outstanding short story. She was also named
MVP of the Varsity volleyball team and was given
a trophy and P10,000. Finally, she received a
Fellowship Award from the University of California
to pursue a master's degree in American
literature. The fellowship is for $10,000 plus free
board and lodging. Should Q include these awards
and fellowship in her gross income?

A: The first award granted to Q, a Palanca award,

requires submission of literary works. Hence, this is
included in the gross income because it fails to
meet the legal requirement that the recipient was
selected without any action on his part to enter the
contest or proceeding.

In the second award, Q did not file any application

to enter into any contest. The award was given to
her in recognition for her outstanding performance
in the field of sports. However, the recognition in
the field of sports is not among those stated under
Sec. 28 B *8+ e, to wit: Prizes and awards made
primarily in recognition of religious charitable,
scientific, educational, artistic, literary, or civic
achievement

The fellowship award of $10,000 is however,

excluded from her income as she was selected
therefore without any action on her part and the
same was given to her in recognition of literary and
educational achievement, presumably without her
being required to render future services for the
grantor. (1993 Bar Question)

Prizes and Awards in Sports Competition

Q: What are the requisites for the exclusion of

prizes and awards in competition from gross
income?

A: PATS

1. All Prizes and awards;

2. Granted to Athletes;
3. In local and international sports
Tournaments and competitions; and
4. Sanctioned by their national sports
associations. (Sec. 32 B [7] d, NIRC)

Note: National sports associations are those duly

accredited by the Philippine Olympic Committee.

Q: A won P100,000 in a competition sanctioned by

the national sports association. Give the tax
implication/s as to the recipient as well as to the
donor/contributor.

A: As to the recipient of the award, it is exempt

from income tax. As to the contributor/donor of the
award, it is exempt from donor s tax not based on
the NIRC but on RA 7549. Contributor/Donor is
allowed to claim it as a deduction from gross
income based on RA 7549.

Q: Onyoc, an amateur boxer, won in a boxing

competition sponsored by the Gold Cup Boxing
Council, a sports association duly accredited by the
Philippine Boxing Association. Onyoc received the
amount of P500,000 as his prize which was
donated by Ayala Land Corporation. The BIR tried
to collect income tax on the amount received by
Onyoc who refuses to pay. Decide.

A: The prize will not constitute a taxable income to

Onyoc, hence the BIR is not correct in imposing the
income tax. RA 7549 explicitly provides that All
prizes and awards granted to athletes in local and
international sports tournaments and competitions
in the Philippines or abroad and sanctioned by their
respective national sports association shall be
exempt from income tax.

Neither is the BIR correct in collecting the donor s

tax from Ayala Land corporation. The law is clear
when it categorically stated That the donors of
said prizes and awards shall be exempt from the
payment of the donor s tax. (1996 Bar Question)

13th Month Pay and Other Benefits

Q: How much is the maximum amount allowed for

13th month pay and other benefits to be excluded
from gross income?

A: Gross benefits received by officials and

employees of public and private entities may be
excluded from gross income provided that the total
exclusion shall not exceed P30,000. The excess
would be considered as part of the compensation
income of the employee where it is subject on a
scheduler rate. (Sec. 32 B [7] e, NIRC)

Gains from the Sale of Bonds, Debentures or Other

Certificate of Indebtedness.

Note: The bonds, debentures or other certificate of

indebtedness sold, exchanged or retired must be with
a maturity of more than five years.

Gains from Redemption of Shares in a

Mutual Fund Company

Q: What is a mutual fund company?

A: The term mutual fund company shall mean an

open-end and close-end investment company as
defined under the Investment Company Act. (Sec.22
[BB], NIRC)

Under a Tax Treaty

Q: What is the basis of income being exempted

under a treaty?

A: Among the income excluded from gross income,

hence exempt form income taxation is income of
any kind to the extent required by any treaty
obligation binding upon the Government of the
Philippines. (Sec. 32 B [5], NIRC)

Q: What are the reasons for granting tax

exemption through a treaty?

A:
1. Reciprocity
2. To lessen the rigors of international
juridical double taxation

Q: What are some tax treaties entered into by the

Philippines?

A:
1.
2.
3.
4.
5.

RP-Japan Tax Treaty

RP-US Tax Treaty
RP-France Tax Treaty
RP-Switzerland Tax Treaty
RP-Netherlands Tax Treaty

Q: What is the

Most Favored Nation Clause ?

A: This grants to the contracting party treatment

not less favorable than which has been or may be
granted to the most favored among other
countries. It allows the taxpayer in one state to
avail of more liberal provisions granted in another
tax treaty to which the country of residence of such
taxpayer is also a party; provided that the subject
matter of taxation is the same as that in the tax
treaty under which the taxpayer is liable. (CIR v. SC
Johnson and Son Inc., GR 127105, June 25, 1999)

Q: What are the statutory income tax exemptions?

A:
1. PD 87, Oil Exploration and Development
Act, as amended by PD 1354
2. EO 226, The Omnibus Investment Code of
1987, as amended
3. RA 3538, the exemption of salaries paid in
dollars to non-Filipino citizens for services
rendered to the Ford Foundation
4. RA 6938, Cooperative Code of the
Philippines, as amended by RA 1176, 8241
and 8424
5. RA 7482, Senior Citizens Act as amended
by RA 9257
6. RA 7929, Urban Development and
Housing Act of 1992
7. RA 8502, Jewelry Industry Development
Act of 1998
8. RA 8282, which exempts income of the
SSS form income taxation
9. RA 8479, An Act Deregulating the
Downstrean Oil Industry and For Other
Purposes

10. RA 9182, The Special Purpose Vehicle Act

ALLOWABLE DEDUCTIONS FROM

GROSS INCOME

Q: Define deductions from gross income.

A: Deductions from gross income refer to items or

amounts authorized by law to be subtracted from
pertinent items of gross income to arrive at the
taxable income.

Q: What are the conditions in order that the

taxpayer can claim deductions?

A: The taxpayer must:

1. Point to some specific provisions of the
statute authorizing the deduction;
2. Able to prove that he is entitled to the
deduction authorized or allowed;
3. Any amount paid or payable which is
otherwise deductible from, or taken into
account in computing gross income or for
which depreciation/amortization may be
allowed, shall be allowed as deduction
only if it is shown that the tax required to
be deducted and withheld therefrom has
been paid to the BIR; (Sec. 34, NIRC) and
4. Deductions for income tax purposes
partake of the nature of tax exemptions
hence, if tax exemptions are to be strictly
construed, then it follows that deductions
must also be strictly construed.

Q: What are the rules in claiming deductions?

A:
1. Deductions must be paid or incurred in
connection with the taxpayer s trade,
business or profession

2. Deductions must be supported by

adequate receipts or invoices (except
standard deduction)

Q: Who are not allowed to claim deductions?

A: NRA-NETB and NRFC are not allowed since their

tax base is gross income.

Note: A RC, NRC, and RA whose income is purely

compensation income are also not entitled such
deductions except for premium payments on health
and/or hospitalization insurance)

Q: Distinguish exclusion from gross income from

allowable deductions from gross income.

A:
EXCLUSION
ALLOWABLE
DEDUCTIONS
Refers to a flow of wealth which
does not form part of the gross
income because:
1. it is exempted by the
fundamental law;
2. it is exempted by the
statute;
3. it does not come within
the definition of income
Refer to amounts
which the law
allows as
deductions from
gross income order
to arrive at net
income or taxable
income

Material to arrive at gross

income
Necessary to arrive
at net or taxable
income
Something earned or received
which do not form part of the
gross income
Something paid or
incurred in earning
gross income

Q: Distinguish exemption from allowable

deduction.

A:
EXEMPTION
ALLOWABLE
DEDUCTION
An immunity or privilege, a
freedom from a charge or
burden to which others
are subjected.
A subtraction from gross
income
Generally receipts which
are excluded from taxable
income.
Not receipts, but are,
expenditures which are
permitted to be subtracted
from income to determine
the amount subject to tax.
The theoretical personal,
family and living
expenses of an individual.
Reduction of wealth
which helped earn the
income subject to tax.

Q: Distinguish allowable deductions from gross

income from personal exemptions.

A:
ALLOWABLE
DEDUCTIONS
PERSONAL
EXEMPTIONS
As to nature
In the nature of business
expenses
In the nature of personal,
living or family expenses
As to purpose
To recover or recoup the
cost of doing business
To recover the personal,
living and family expenses
paid or incurred during
the taxable year
As to claimant
May be claimed by
individual and corporate
taxpayer s

XPN: 1. NRA- NETB

2. NRFC
Are granted only to
individual taxpayer

XPN: NRA- NETB

As to amount
The actual expenses paid
or incurred in the conduct

of trade, business or
Arbitrary amounts
granted to approximate
the personal expenses

profession
that may be incurred by
individual taxpayer
As to kinds of deductions or exemptions
Classified into:
1. Itemized deductions;
2. Optional Standard
Deductions:
a. Individual 40% of gross
sales or
receipts
b. Corporation 40% of gross
income
Exemption may be
classified into:
1. Basic personal
exemption;
2. Additional personal
exemption of P25k for
every qualified
dependent,
legitimate, recognized
illegitimate child or
children not more
than 4

Q: What are the kinds of allowable deductions

from gross income?

A:
1. Itemized Deductions: BaD2-TRIP-C-O NEL
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Bad debts;
Depreciation;
Depletion;
Taxes;
Research and development costs;
Interest;
Pension trust contribution;
Charitable and other contributions;
Ordinary and Necessary Expenses;
Losses.

2. Optional Standard Deduction (OSD)

3. Special Deductions

Q: What are the requisites for deductibility in

general?

A: WaR-With-Pro2
1. The deductions must not have been
Waived;
2. The Requirements for deductibility must
be met;
3. The Withholding and payment of the tax
required must be shown;
4. There must be Proof of entitlement to the
deductions; ("No deduction without
documentation.") and
5. There must be a specific Provision of law
allowing the deductions, since deductions
do not exist by implication.

Note: The burden of proof is with the taxpayer

for it to be deductible

ITEMIZED DEDUCTION

ORDINARY AND NECESSARY EXPENSES

Q: What are the requisites for deductibility of

expenses (in general)?

A: D-STROWN
1. Paid or incurred During the taxable year;
2. The expense must be Substantiated by
proof; (substantation rule)
3. The expense must be incurred in Trade or
business carried on by the taxpayer;
4. The expense must be Reasonable;
5. The expense must be Ordinary and
necessary;
6. If subject to Withholding taxes, proof of
payment to BIR; and
7. Expenses must Not be against public
policy, public moral or law such as bribes,
kickbacks, for immoral purposes.

Q: What is ordinary expense?

A: It is any expense that is normal or usual in

relation to the taxpayer s business and the
surrounding circumstances. (General Electric [P.I.]
Inc. v. Collector, CTA Case 1117, July 14, 1963)

Q: What is necessary expense?

A: Necessary expense is one which is appropriate

and helpful in the development of taxpayer s
business and is intended to minimize losses or to
increase profits. (Ibid.)

Q: What is the test to determine whether or not

an expense is ordinary and necessary?

A: If they are directly attributable to the

development, management, operation, and or
conduct of trade or business of the taxpayer, or in
the exercise of the taxpayer s profession, including:
1. Reasonable allowances for salaries,
wages and other compensation for
personal services actually rendered,
including gross monetary value of fringe
benefits
2. Travel expenses in pursuit of trade or

business
3. Rental and other payments for the
continued use or possession of property,
for the purpose of trade, business or
profession
4. Entertainment, amusement and
recreation expenses during the taxable
year

Q: Distinguish ordinary expenses from capital

expenditures.

A: Ordinary expenses are those which are common

to incur in trade or business. On the other hand,
capital expenditures are those incurred to improve
assets and benefits for more than 1 taxable year.
Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year.

Q: How is the substantiation rule complied with?

A: The taxpayer shall substantiate the expense

being deducted with sufficient evidence such as
official receipts or other adequate records
showing:
1. The amount of the expense being
deducted; and
2. The direct connection or relation of the
expense being deducted to the
development, management, operation
and/or conduct of the trade, business or
profession of the taxpayer.

Q: When there are no receipts to prove a

deduction, can the taxpayer still claim it as a
deduction?

A: Yes, the lack of supporting vouchers, receipts,

and other documentary proof however may be
excused under Sec. 235 of the NIRC, the provision
which requires the preservation of the books of
accounts and other accounting records for a period
of 3 years from the date of last entry. (Basilan
Estates v. CIR, GR L022492, Sept. 5, 1967)

Q: What is the Cohan Rule Principle?

A: Under this principle, taxpayers may use

estimates when they can show that there is some
factual foundation on which to base a reasonable
approximation of the expense, they can prove that
they had made a deductible expenditure but just

cannot prove how much that expenditure was.

(Cohan v. Commissioner, 39 F (2d) 540)

It is the use of estimates or approximations of the

amount of cash and other assets where the
taxpayer lacks adequate records.

Note: If there is showing that expenses have been

incurred but the exact amount thereof cannot be
ascertained due to the absence of receipts and
vouchers of the expenditures involved, the BIR will
make an estimate of deduction that may be allowable
in computing the taxpayer's taxable income bearing
heavily against the taxpayer whose inexactitude is of
his own making. That disallowance of 50% of the
taxpayer s claimed deduction is valid. (RMC 23-2000)

Q: What are included as ordinary and necessary

expenses?

A:
1. Salaries, wages and other forms of
compensation for personal services
actually rendered
2. Travelling expenses
3. Rental expenses
4. Entertainment, amusement and
recreation
5. Advertising and promotional expenses
6. Cost of materials and supplies
7. Repairs

Q: MC, a contractor who won the bid for the

construction of a public highway, claims as
expense, facilities fees which according to them is
standard operating procedure in transactions with
the government. Are these expenses allowable as
deduction from gross income?

A: No, the alleged facilitation fees which they

claims as standard operating procedure in
transactions with the government comes in the
form of bribes or kickback which are not allowed
as deductions from gross income as they are illegal.
(Sec. 34 A [1] c, NIRC)

Q: OXY is the president and CEO of ADD

Computers, Inc. When OXY was asked to join the
government service as director of a bureau under
the Department of Trade and Industry, he took a
leave of absence from ADD. Believing that its
business outlook, goodwill and opportunities
improved with OXY in the government, ADD
proposed to obtain a policy of insurance on his
life. On ethical grounds, OXY objected to the
insurance purchase but ADD purchased the policy
anyway. Its annual premium amounted to
P100,000. Is said premium deductible by ADD
Computers, Inc.?

A: No, the premium is not deductible because it is

not an ordinary business expense. The term
"ordinary" is used in the income tax law in its
common significance and it has the connotation of
being normal, usual or customary. (Deputy v. Du
Pont, 308 US 488 [1940]) Paying premiums for the
insurance of a person not connected to the
company is not normal, usual or customary.

Another reason for its non-deductibility is the fact

that it can be considered as an illegal
compensation made to a government employee.
This is so because if the insured, his estate or heirs
were made as the beneficiary (because of the

requirement of insurable interest), the payment of

premium will constitute bribes which are not
allowed as deduction from gross income. (Sec. 34 A
[l] c, NIRC)

On the other hand, if the company was made the

beneficiary, whether directly or indirectly, the
premium is not allowed as a deduction from gross
income (2004 Bar Question)

Compensation for Services.

Q: What are the conditions for its deductibility?

A:
1. Services actually rendered;
2. Compensation is for such services
rendered; and
3. Reasonable.

Q: What are included in compensation for services

which are allowed as deductions from gross
income?

A:
1. Wages, salaries, commissions,
professional fees, vacation-leave pay,
retirement pay, and other compensation
2. Bonuses in good faith
3. Pensions and compensation for injuries if
not compensated for by insurance or
otherwise
4. Grossed-up monetary value of fringe
benefit provided for, as long as the final
tax imposed has been paid. The fringe
benefit must have been granted to
managerial and supervisory employees,
otherwise it cannot be availed as
deduction.

Q: What are the conditions for deductibility of

bonus?

A: Although, there is no fixed test for determining

the reasonableness of a bonus as an additional
compensation. The following conditions may be
taken into consideration:
1. The payment must be made in good faith
2. The character of the taxpayer s business
3. The volume and amount of its net
earnings
4. Its locality
5. The type and extent of the services
rendered
6. The salary policy of the corporation
7. The size of the particular business
8. The employees qualification and
contributions to the business venture
9. General economic conditions (C.M.
Hoskins & Co., Inc. v. CIR, GR L-24059,
Nov. 28, 1969) (2006 Bar Question)

Q: Gold and Silver Corporation gave extra 14th

month bonus to all its officials and employees in
the total amount of P75 million. When it filed its
corporate income tax return the following year,
the corporation declared a net operating loss.
When the income tax return of the corporation
was reviewed by the BIR the following year, it
disallowed as item of deduction the P75 million
bonus the corporation gave its officials and
employees on the ground of unreasonableness.
The corporation claimed that the bonus is an
ordinary and necessary expense that should be
allowed. If you were the CIR, how will you resolve
the issue?

A: I will rule against the deductibility of the bonus.

The extra bonus is not normal to the business and
unreasonable. Giving an extra bonus at a time that
the company suffers operating losses is not a
payment done in good faith and is not normal to
the business, hence unreasonable and would not
qualify as ordinary and necessary expense. (2006
Bar Question)

Q: Noel is a bright computer science graduate. He

was hired by Hewlett Packard. To entice him to
accept the job, he was offered the arrangement

that part of is compensation would be an

insurance policy with a face value of P20 million.
The parents of Noel are made the beneficiaries of
the insurance policy. Can the company deduct
from its gross income the amount of the
premium?

A: Yes, the premiums paid are ordinary and

necessary business expenses of the company. They
are allowed as a deduction from gross income so
long as the employer is not a direct or indirect
beneficiary under the policy of insurance. Since the
parents of the employee were made the
beneficiaries, the prohibition for their deduction
does not exist. (Sec. 36 A [4], NIRC)

Travelling Expenses

Q: What are the requisites for its deductibility?

A: RAP
1. Reasonable and necessary expenses;
2. Incurred or paid while Away from home;
and

3. In Pursuit of trade or business.

Q: What does the term

away from home mean?

A: The term away from home means away from

the location of the employee s principal place of
employment regardless of where the family
residence is maintained.

Q: What are included as travelling expense?

A: It includes transportation, meals and lodging.

(RR No. 2)

Rental Expense

Q: What are the requisites for its deductibility?

A:
1. Payment was made as a condition to the
continuous use of or possession of the
property;
2. Taxpayer has not taken or is not taking
title to the property or has no equity
other than that of a lessee, user or
possessor;
3. Property must be used in the trade or
business; and
4. Subject to withholding tax (5%) if
business property the rental must be at
least P500 in case of non-business or
residential property the rental is at least
P10,000 subject to 5% tax.

Q: What are included as rental expense?

A:
1. Aliquot part of the amount used to
acquire leasehold over the number of
years the lease will run
2. Taxes and other obligations of the lessor
paid by the lessee
3. Annual depreciation of the cost of the
leasehold improvements introduced by
the lessee over the remaining period of
the lease, or over the life of the
improvements, whichever period is
shorter.

Note: It is not the cost of the leasehold

improvements but only its annual
depreciation that is considered as rental
expense.

Repairs

Q: When is repair expense allowed as a deduction

from gross income?

A: Repairs are allowed as deduction when it is

minor and ordinary. Major and extraordinary
repairs are capitalized and included in determining
depreciation expense.

Entertainment, Amusementand Recreation

Q: What are the requisites for deductibility?

A: SPuNDR- B
1. Substantiated with sufficient evidence;
2. Paid or incurred in the Pursuit of trade or
business ;
3. Not contrary to laws, morals and public
policy or public order;
4. Paid or incurred During the taxable year;
5. Reasonable; and
6. Does not constitute Bribe, kickback or

other similar payments.

Q: What are included as entertainment,

amusement and recreation expenses?

A: They include representation expenses and/or

depreciation or rental expense relating to
entertainment facilities.

Note: Representation expenses shall refer to

expenses incurred by a taxpayer in connection with
the conduct of his trade, business or exercise of
profession, in entertaining, providing amusement and
recreation to, or meeting with, a guest or guests at a
dining place, place of amusement, country club,
theater, concert, play, sporting event and similar
events or places.

Note: Entertainment facilities shall refer to a yacht,

vacation home or condominium; and any other similar
item of real or personal property used by the taxpayer
primarily for the entertainment, amusement, or
recreation of guests or employees. (Sec. 2, RR 102002)

Q: What expenses are not considered

entertainment, amusement and recreation
expenses?

A:
1. Expenses which are treated as
compensation or fringe benefits for
services rendered under an employeremployee relationship
2. Expenses for charitable or fund-raising
events
3. Expenses for bonafide business meeting
of stockholders, partners or directors

4. Expenses for attending or sponsoring an

employee to a business league or
professional organization meeting
5. Expenses for events organized for
promotion, marketing and advertising
including concerts, conferences,
seminars, workshops, conventions, and
other similar events
6. Other expenses of similar nature. (Sec. 3,
RR 10-2002)

Q: Is there any ceiling on the amount allowed as

entertainment, amusement and recreation
expense?

A: Yes, entertainment, amusement and recreation

expense shall be allowed as a deduction from gross
income but in no case shall exceed:
1. For taxpayers engaged in sale of goods or
0.50% of net sales (i.e., gross
properties
sales less sales returns or allowances and
sales discounts)
2. For taxpayers engaged in sale of services,
including exercise of profession and use
or lease of properties
1.00% of net
revenue (i.e., gross revenue less
discounts)
3. For taxpayers deriving income from both
sale of goods and services
the allowable
deduction shall in all cases be
determined based on an apportionment
formula taking into consideration the
percentage of the net sales/net revenue
to the total net sales/net revenue, but
which in no case shall exceed the
maximum percentage ceiling provided
(Sec. 5, RR 10-2002)

Apportionment Formula:

Net sales/net revenue x Actual Expense

Total Net sales and revenue

Advertising and Promotional Expenses

Q: What are the requisites for the deductibility of

advertising and promotional expenses?

A:
1. Substantiated with sufficient evidence;
2. All payments for the purchase of
promotional give-aways, contest prizes or
similar material must be properly
receipted; and
3. All payments for services such as radio
and TV time, print ads, talent fees,
advertising expense or know-how must
be subjected to withholding tax.

Q: Algue, Inc. is a domestic corporation engaged in

engineering, construction and other allied
activities. Philippine Sugar Estate Development
Company (PSEDC) appointed Algue as its agent,
authorizing it to sell its land, factories and oil
manufacturing processes. Pursuant to said
authority and through the joint efforts of the
officers of Algue, they formed the Vegetable Oil
Investment Corporation, inducing other persons to
invest in it. This new corporation later purchased
the PSEDC properties. For this sale, Algue received
as an agent a commission of P125,000 and from
this commission the P75,000 promotional fees
were paid to the officers of Algue. Is the
promotional expense deductible?

A: Yes, the promotional expense paid by PSEDC to

Algue amounting to P75,000 is deductible for it was
reasonable and not excessive. Algue proved that
the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the
payees in inducing investors and prominent
businessmen to venture in an experimental
enterprise (Vegetable Oil Investment Corporation)
and involve themselves in a new business requiring
millions of pesos. (CIR v. Algue, GR L-28896 Feb. 17,
1988)

Costs of Materials and Supplies

Q: Are all materials and supplies deductible

whether or not they are used?

A: No, materials and supplies are deductible only to

the amount actually consumed or used in the
operation during the taxable year.

Q: What are the methods utilized to determine

materials used?

A:
1. Actual consumption method or
inventory method
2. Direct purchase method

Q: Assuming the taxpayer purchases materials but

has no record of consumption, is it deductible?
A: Yes, provided the net income is clearly reflected
by direct purchase method.

Interests

Q: How is interest as a deduction from gross

income defined?

A: Interest shall refer to the payment for the use or

forbearance or detention of money, regardless of
the name it is called or denominated. It includes the
amount paid for the borrower s use of money
during the term of the loan, as well as for his
detention of money after the due date for its
repayment. (Sec. 2 [a], RR 13-2000)

Q: What are the requirements under the NIRC for

interest to be deductible?

A: The following requirements must be met for

interest to be deductible:
1. There must be an indebtedness;
2. Incurred in connection with the
taxpayer s trade or business;
3. Indebtedness must be that of the
taxpayer;
4. Interest is stipulated in writing; and
5. Interest expense was incurred or paid
during the taxable year. (1992 Bar
Question)

Q: Is there any limitation on the amount of

deductible interest expense?

A: The taxpayer s otherwise allowable deduction

for interest expense shall be reduced by an amount
equal to 33% of the interest income subject to final
tax. (Sec. 34 B [1], NIRC)

Note: This is to safeguard from tax arbitrage schemes.

This limitation on the deductibility of interest expense
was legislated to specifically address the tax arbitrage
arising from the difference between the 20% final tax
on interest income and the normal corporate income
tax rate under which interest expense can be claimed

as a deduction.

Note: The rate of interest limitation is actually the

difference between the normal corporate income tax
and the 20% final tax as a percentage of the NCIT rate,
rounded off. Thus under the 30% NCIT, (30%-20%) /
30% = 33.33%.

Q: What is tax arbitrage?

A: It is a strategy which takes advantage of the

difference in tax rates or tax systems as the basis
for profit.

Q: What are the deductible interest expenses?

A: Interest:
1. On taxes, such as those paid for
deficiency or delinquency, since taxes are
considered indebtedness (provided that
the tax is a deductible tax.) However,
fines, penalties, and surcharges on
account of taxes are not deductible. The
interest on unpaid business tax shall not
be subjected to the limitation on
deduction
2. Paid by a corporation on scrip dividends
3. On deposits paid by authorized banks of
the BSP to depositors, if shown that the
tax on such interest was withheld
4. Paid by a corporate taxpayer, liable on a
mortgage upon real property of which
the said corporation is the legal or
equitable owner, even though it is not
directly liable for the indebtedness

Q: What are the non-deductible interest

expenses?

A:
1. Interest on preferred stock, which in
reality is dividend
2. Interest on unpaid salaries and bonuses

3. Interest calculated for cost keeping

4. Interest paid where parties provide no
stipulation in writing to pay interest
5. If the indebtedness is incurred to finance
petroleum exploration
6. Interest paid on indebtedness between
related taxpayers
7. Interest on indebtedness paid in advance
through discount or otherwise and the
taxpayer reports income on cash basis

Note: Interest is allowed as a deduction in

the year the indebtedness is paid, not when
the interest was paid in advance.

Q: Who are related taxpayers?

A:
1. Members of the same family, brothers
and sisters, whether in full or half blood,
spouse, ancestors and lineal descendants
2. Stockholders and a corporation, when he
holds more than 50% in value of its
outstanding capital stock, except in case
of distribution in liquidation
3. Corporation and another corporation,
with interlocking stockholders
4. Grantor and fiduciary in a trust
5. Fiduciary of a trust and fiduciary in
another trust, if the same person is a
grantor with respect to each trust
6. Fiduciary of a trust and beneficiary of
such trust

Q: What is the Arm s Length Interest Rate?

A: It is the rate of interest which was charged or

would have been charged at the time the
indebtedness arose in independent transaction
with or between unrelated parties under similar
circumstances.

Q: Is theoretical interest deductible?

A: No, because:
1. It is not paid or incurred for it is merely
computed or calculated.
2. It does not arise from interest bearing
obligation.

Q: What is the optional treatment of interest

expense on capital expenditure?

A: Interest incurred to acquire property used in

trade, business or profession may be allowed
either:
1. Treated as capital expenditure, i.e., it
forms part of the cost of the asset; or
2. As a deduction. (Sec. 34 B [2], NIRC)

Note: Interest paid in advance, interest periodically

amortized and interest incurred to acquire property
used in trade or business is also treated the same, the
taxpayer can deduct it as an outright deduction or
capital expenditure.

Q: Is the interest on loans used to acquire capital

equipment or machinery deductible from gross
income?

A: Yes, the law gives the taxpayer the option to

claim it as a deduction or treat it as capital
expenditure interest incurred to acquire property
used in trade, business or exercise of a profession.
(1999 Bar Question)

Taxes

Q: Are all taxes deductible?

A:
GR: Taxes paid or incurred during the taxable
year in connection with trade, business or
profession of the taxpayer shall be allowed as
deduction.

XPNs: (ISE2F2)
1. Income tax
2. Special assessments
3. Estate and donor s taxes
4. Excess electric consumption tax
5. Foreign income tax, if the taxpayer makes
use of tax credit
6. Final taxes, being in the nature of income
taxes

Q: What are the examples of taxes which are

deductible?

A:
1. Import duties
2. Business licenses, excise and stamp taxes
3. Local government taxes such as real
property taxes, license taxes,
professional taxes, amusement taxes,

franchise taxes and other similar

impositions.

Q: What are the requisites for deductibility of

taxes?

A:
1. Payments must be for taxes;
2. Tax must be imposed by law on, and
payable by the taxpayer;
3. Paid or incurred during the taxable year
in connection with taxpayer s trade,
business or profession; and
4. Taxes are not specifically excluded by law
from being deducted from the taxpayer s
gross income.

Q: Deduction for taxes may be claimed, when?

A:
GR: Taxes may be deducted only on the year it
was paid or incurred.

XPN: In the case of contingent tax liability, the

obligation to deduct arises only when the
liability is finally determined.

Q: What is the treatment to income taxes paid in

foreign countries?

A: The taxpayer may either claim it as:

1. Foreign tax credits against Philippine

income tax due of citizens and domestic
corporations;
2. A deduction from gross income of citizens
and domestic corporations.

Q: What is foreign tax credit?

A: It is the right of an income taxpayer to deduct

from income tax payable the foreign income tax he
has paid to a foreign country subject to certain

limitations. This is to avoid the rigors of indirect

double taxation, although not prohibited by the
Constitution for being violative of the due process,
results to a tax being paid twice on the same
subject matter or transaction.

Q: Distinguish tax credit from tax deduction.

A:
TAX CREDIT
TAX DEDUCTION
Subtracted from:
Tax due
Income before tax
Reduces:
The taxpayer s tax liability
peso for peso
Income upon which tax
liability is computed

Q: Who are entitled to claim tax credit?

A:
1. Resident citizens
2. Domestic corporations (Sec. 34 C [3] a,
NIRC)
3. Members of a GPP
4. Beneficiary of an estate or trust (Sec. 34 C
[3] b, NIRC)

Q: Who are not entitled to claim tax credit?

A:
1. Alien individuals, whether resident or

non-residents
2. Foreign corporation, whether resident or
non-residents
3. Non-resident citizen including overseas
contracted workers and seamen

Q: What are the limitations in when claiming tax

credit?

A:
1. The amount of the credit in respect to
the tax paid or incurred to any country
shall not exceed the same proportion of
the tax against which such credit is taken,
which the taxpayer s taxable income
from sources within such country bears
to his entire taxable income; and
2. The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which
the taxpayer s income from sources
without the Philippines taxable under
Title II of the NIRC (Tax on Income) bears
to his entire taxable income for the same
taxable year. (Sec. 34 C [4], NIRC)

Q: What is Tax Benefit Rule?

A: Taxes allowed as deductions, when refunded or

credited shall be included as part of gross income
in the year of receipt to the extent of the income
tax benefit of said deduction. (Sec. 34 C [1], NIRC).

Q: In 2006, Sally, a fruit market operator received

an assessment for customs duties for her
imported market equipment in the amount of
P75,000. Believing that the amount is excessive,
she paid the same under protest. Because of the
assurances from her retained CPA that she stands
a good chance of being able to secure a refund of
P50,000 she did not deduct the same anymore
from her income tax return. She deducted only
the P25,000 which she believed was due from her.
She received the refund amounting to P50,000 in
2008. What should have been the proper tax
treatment of the payment of P75,000 in 2006?

A: Sally should have deducted the total P75,000

customs duties in 2006. When she received the
refund of P50,000 in 2008, she should have
included the amount as part of her income. Under
the tax benefit rule, taxes allowed as deductions,
when refunded or credited shall be included as part
of gross income in the year of receipt to the extent
of the income tax benefit of said deduction.

Q: What is the limitation on such deduction?

A: In the case of non-resident alien individual

engaged in trade or business in the Philippines and
a resident foreign corporation, the deductions for
taxes shall be allowed only if and to the extent that
they are connected with income from sources
within the Philippines. (Sec. 34 C [2], NIRC)

Q: What are non-deductible taxes?

A: Taxes not allowed as deduction from gross

income to arrive at taxable income:
1. Income tax provided unded the NIRC
2. Income taxes imposed by authority of
any foreign country

Q: What is the tax treatment of special

assessment?

A: Special assessments are deductible as taxes

where these are made for the purpose of:
1. Maintenance or repair of local benefits, if
the payment of such assessment is
ordinary and necessary in the conduct of
trade, business or profession
2. Constructing local benefits tending to
increase the value of the property
assessd, the payments are in the nature
of capital expenditures

Note: The burden is on the taxpayer to show the

allocation of the amounts assessed to the
different purposes.

Losses

Q: What are considered losses

deductions from gross income?

for purposes of

A: Losses actually sustained during the taxable year

and not compensated for by insurance or other
forms of indemnity. (Sec. 34 D [1], NIRC)

Q: Give the requisites for the deductibility of a

loss.

A: The requisites for deductibility of a loss are: TAEIE-C45

1. Loss belongs to the Taxpayer;
2. Actually sustained and charged off during
the taxable year;
3. Evidenced by a closed and completed
transaction;
4. Not compensated by Insurance or other
forms of indemnity;
5. Not claimed as a deduction for Estate tax
purposes in case of individual taxpayers;
and
6. If it is Casualty loss, it is evidenced by a
declaration of loss file within 45 days
with the BIR. (1998 Bar Question)

Q: What are the types of losses?

A:

1. Ordinary Losses:
a. Incurred in trade or business, or
practice of profession;
b. Of property connected with trade,
business or profession, if the loss
arises from storms, shipwreck, fires
or other casualties, or from robbery,
theft or embezzlement. (Casualty
loss)
i. Total Destruction
the basis of
the loss is the net book value
immediately preceding the
casualty to be reduced by the
amount of insurance or
compensation received;
ii. Partial Destruction
the
replacement cost to restore the
property to its normal operating
condition, but in no case shall the
deductible loss be more than the
net book value of the property as
a whole, immediately before
casualty. The excess over the net
book value immediately before
the casualty should be capitalized,
subject to depreciation over the
remaining useful life of the
property.

2. Net Operating Loss Carry-over (NOLCO)

3. Capital Losses losses from sale or

exchange of capital assets. Deductible to
the extent of capital gains only.

4. Special Losses:
a. Wagering losses deductible only to
the extent of gain or winnings
deemed to only apply to individuals
(Sec. 34 D [6], NIRC)
b. Losses on wash sales of stocks
not
deductible since these are
considered as artificial loss
c. Abandonment losses in petroleum
operation all accumulated
exploration and development

expenditures pertaining thereto

shall be allowed as a deduction
d. Abandonment losses in producing
well
the unamortized cost thereof,
as well as the undepreciated cost of
equipment directly used therein,
shall be allowed as deduction in the
year the well, equipment or facility
is abandoned
e. Losses due to voluntary removal of
building incident to renewal or
replacements
deductible expense
from gross income
f. Losses from sales or exchanges of
property between related taxpayers
losses are not deductible but gains
are taxable.
g. Losses of farmers
If incurred in the
operation of farm business, it is
deductible
h. Loss in shrinkage in value of stock
If the stock of the corporation
becomes worthless (not mere
market fluctuations,) the cost or
other basis may be deducted by the
owner in the taxable year in which
the stock becomes worthless

Q: What is NOLCO?

A: It is the excess of allowable deductions over

gross income of business for any taxable year which
had not been previously offset as deduction from
gross income.

Note: It shall be carried over as deduction from gross

income for the next 3 consecutive years following the
year of such loss. Provided that:
1. The taxpayer was not exempt from income tax
in the year of such net operating loss; and
2. There has been no substantial change in the
ownership of the business or enterprise.

Q: What is the meaning of substantial change in

ownership of the business or enterprise ?

A: The 75% equity rule (or ownership or interest

rule) shall only apply to transfer or assignment of
the taxpayer s net operating losses as a result of or
arising from the said taxpayer s merger or
consolidation or business combination with another
person.

The transferee or assignee shall not be entitled to

claim the same as a deduction from gross income
except when as a result of the said merger,
consolidation or combination, the shareholders of
the transferor/assignor, or the transferor gains
control of:
1. At least 75% or more in nominal value of the
outstanding issued shares or paid up capital of
the transferee/assignee, if a corporation
2. At least 75% or more interest in the business
of the transferee/assignee, if not a corporation
(75% equity rule) (Sec. 2.4, RR 14-2001)

Q: How do you determine whether or not

substantial change in ownership occurred?

A: Substantial change in ownership shall be

determined on the basis of any change in the
ownership in said business or enterprise arising
from or incident to its merger, consolidation, or
combination with another person.

Q: When do you determine whether there is

substantial change in ownership?

A: The substantial change in the ownership of the

business or enterprise shall be determined as of the
end of the taxable year when NOLCO is to be
claimed as deduction. (Sec. 5.1, RR 14-2001)

Q: In case of mines other than oil and gas wells,

NOLCO shall be allowed for what period?

A: A net operating loss during the first ten years of

operation shall be allowed as NOLCO for the next 5
years.

Q: What are the non-deductible losses?

A: Losses:
1. In dealings between related taxpayers.
2. From wash sales of stocks.
3. Due to removal of buildings purchased
(not existing and not incident to renewal)

Q: X, a travelling salesman in Sulu. In the course of

his travel, a band of MNLF seized his car by force
and used it to kidnap a foreign missionary. The
next day, the military and the MNLF band had a
chance encounter which caused X s car to be a
total wreck. Can X deduct the value of his car from
his income as casualty loss?
A: It depends.

If X is an employee of a company, he cannot deduct

the losses incurred since an individual taxpayer who
derives income from compensation is allowed only
personal and additional deductions and the
reasonable premiums for health and hospitalization
insurance.

If X is engaged in trade or business, he can deduct

the value of the car from his gross income provided
he can recover only up to the amount of the
casualty loss that does not exceed its book value,
and that it is not compensated by insurance or
otherwise. (1993 Bar Question)

Q: Are worthless securities deductible from gross

income for income tax purposes?

A: Worthless securities, which are ordinary assets,

are not allowed as deduction from gross income
because the loss is not realized. However, if these
worthless securities are capital assets, the owner is
considered to have incurred a capital loss as of the
last day of the taxable year and therefore,
deductible to the extent of capital gains. This
deduction, however, is not allowed to a bank or
trust company. (Sec. 34 D [4], 34 E [2], NIRC) (1999
Bar Question)

Bad Debts

Q: What are bad debts?

A: Bad debts refer to debts resulting from the

worthlessness or uncollectibility, in whole or in
part, of amount due to the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered. (Sec. 2, RR 5-99)

These are debts due to the taxpayer actually

ascertained to be worthless and charged off in the
books of the taxpayer within the taxable year

except those:

1. Not connected with trade, business or

profession; and
2. Between related taxpayers

Note: A mere recording in the taxpayer s books of

account estimated uncollectible accounts does not
constitute a write-off of the said receivable, hence, it
shall not be a valid basis for its deduction as a bad
debt expense.

Q: What are the general requisites for

deductibility of bad debts?

A: USTCAR
1. The debts are Uncollectible despite
diligent effort exerted by the taxpayer;

Note: To prove that the taxpayer exerted

diligent efforts to collect the debts:
1. Sending of statement of accounts;
2. Sending of collection letters;
3. Giving the account to a lawyer for
collection; and
4. Filing a collection case in court.

2. Existing indebtedness Subsisting due to

the taxpayer which must be valid and
legally demandable;
3. Connected with the taxpayer s Trade,
business or practice of profession;
4. Actually Charged off in the books of
accounts of the taxpayer as of the end of
the taxable year;
5. Actually Ascertained to be worthless and
uncollectible as of the end of the taxable
year; and
6. Must not be sustained in a transaction
entered into between Related parties.

Note:

1. In the case of banks, in lieu of

requisite No. 5 above, the BSP, thru its
Monetary Board, shall approve the writing
off of said indebtedness from the banks
books of accounts at the end of the taxable
year.
2. In no case may a receivable from an
insurance or surety company be written off
from the taxpayer s books and claimed as
bad debts deduction unless such company
has been declared closed due to insolvency
or for any such similar reason by the
Insurance Commissioner.

Q: What factors will determine whether or not the

debts are bad debts?

A: The factors to be considered include, but are not

limited to, the following:
1. The debtor has no property nor
visible income;
2. The debtor has been adjudged
bankrupt or insolvent;
3. There are numerous debtors with
small amounts of debts and further
action on the accounts would entail
expenses exceeding the amounts
sought to be collected;
4. The debt can no longer be collected
even in the future; and
5. Collateral shares have become
worthless. (2004 Bar Question)

Note: "Worthless" is not determined by an inflexible

formula or slide rule calculation, but upon the exercise
of sound business judgment. In order that debts be
considered as bad debts because they have become
worthless, the taxpayer should:
1. Ascertain the debt to be worthless in the year for
which the deduction is sought.
2. Act in good faith in ascertaining the debt to be
worthless (CIR v. Goodrich International Rubber
Co., GR L-22265, Dec. 22, 1967).

Q: Are reserves for bad debts deductible from

gross income for income tax purposes?

A: No, bad debts must be charged off during the

taxable year to be allowed as deduction from gross
income. The mere setting up of reserves will not
give rise to any deduction. (Sec. 34 [E], NIRC)

Q: What is the tax benefit rule as applied to bad

debts recovered?

A: This states that the taxpayer is obliged to declare

as taxable income subsequent recovery of bad
debts in the year they were collected to the extent
of the tax benefit enjoyed by the taxpayer when the
bad debts were written off and claimed as
deduction from gross income.

Q: Is the testimony of a CPA sufficient as

substantial evidence for the deductibility of a
claimed worthless debt?

A: No, mere testimony of a CPA explaining the

worthlessness of said debts is seen as nothing more
than as a self-serving exercise which lacks probative
value. Mere allegations cannot prove the
worthlessness of such debts. (Philippine Refining
Co. v. CA, GR 118794, May 8, 1996)

Depreciation

Q: What is depreciation?

A: Depreciation is the gradual diminution in the

useful (service) value of tangible property used in
trade, profession or business resulting from
exhaustion, wear and tear and obsolescence.

Q: What are the requisites for its deductibility?

A: RUCA
1. Reasonable;
2. Property Used in trade, business, or
exercise of a profession;
3. The allowance must be Charged off
within the taxable year; and
4. Schedule on the allowance must be
Attached to the return.

Q: What are the methods of depreciation under

the NIRC?

A:
1. Straight line method
2. Declining balance method
3. Sum of the years digit method
4. Any other method which may be
prescribed by Department of Finance
upon recommendation of the CIR.

Q: How is the useful life determined on which

depreciation rate is based?

A: The BIR and the taxpayer may agree in writing on

the useful life of the property to be depreciated
subject to modification if justified by facts or
circumstances. The change shall not be effective
before the taxable year on which notice in writing
by certified mail or registered mail is served by the
party initiating. However, if there is no agreement
and the BIR does not object to the rate and useful
life being used by the taxpayer, the same shall be
binding.

Q: Who is entitled to claim depreciation expense?

A: The person who sustains an economic loss from

the decrease in property value due to depreciation
which is usually the owner. Non-resident aliens and
foreign corporations are allowed to deduct only
when the property is located within the Philippines.
(Sec. 34 [F], NIRC)

Q: What are depreciable assets and nondepreciable assets for tax purposes?

A:
1. Depreciable Assets:
a. Tangible property used in trade or
business
b. Intangible property like patent
copyrights and franchises
2. Non-depreciable Assets:
a. Inventories or stock
b. Land
c. Bodies of minerals subject to
depletion
d. Personal effects and clothing

Q: What method shall be used in depreciation of

properties used in petroleum operations?

A: It may either be straight line or declining balance

method with a useful life of 10 years or shorter, as
allowed by the CIR.

Note: If the property is not directly related to

production, depreciation is for 5 years using straight
line method. (Sec. 34 F [4], NIRC)

Q: What method shall be used in depreciation of

properties used in mining operations other than
petroleum operations?

A:
1. At the normal rate of depreciation if the
expected life is less 10 years or less; or
2. Depreciated over any number of years
between 5 years and the expected life if
the latter is more than 10 years and the
depreciation thereon is allowed as
deduction from taxable income.

Provided, that the contractor notifies the CIR at the

beginning of the depreciation period which
depreciation rate allowed will be used.

Q: Z purchased fully depreciated machineries and

entered the machineries in his books at P120,000.
Based on the independent appraisal and
engineering report, Z assigned to the machineries
an economic life of 5 years. Adopting the straightline method, Z claimed a depreciation deduction
of P24,000 in his income tax return. Is the
deduction proper, considering that in the hands of
the original owner, the said machineries were
already fully depreciated?

A: Yes, the starting point for the computation of

the deductions for depreciation is the reasonable
cost of acquiring the asset and its economic life.
The fact that the machineries were already
depreciated by its original owner does not matter.
Z is allowed a depreciation allowance for the
exhaustion, wear and tear (including reasonable
allowance for obsolescence) of the machineries
which he is using in his trade or business. (Sec. 34
[F], NIRC) (1983 Bar Question)

Q: What is the annual depreciation of a

depreciable fixed asset with a cost of P100,000
having a salvage value of P10,000 and an
estimated useful life of 20 years under the straight
line method?

A: The annual depreciation is P4,500 computed as

follows: Acquisition cost less salvage value, then
divide the difference by its useful life. [100,000
10,000 = 90,000] then [90,000 / 20 = 4,500]

Q: Is depreciation of goodwill deductible from

gross income?

A:
GR: No, while intangibles may be allowed to
be depreciated or amortized, it is only allowed
to those intangibles whose use in the business
or trade is definitely limited in duration. Such
is not the case in goodwill.

XPN: If the goodwill is acquired through

capital outlay and is known from experience
to be of value to the business for only a
limited period. (Sec. 107, RR No. 2) In such
case, the goodwill is allowed to be amortized
over its useful life. (1999 Bar Question)

Depletion

Q: What is depletion?

A: It is the exhaustion of natural resources like

mines and oil and gas wells as a result of production
or severance from such mines or wells.

Q: Who may avail of deduction for depletion?

A: Annual depletion deductions are allowed only to

mining entities which own an economic interest in
mineral deposits. (Sec. 3, RR 5-76)

Q: What is economic interest?

A: It means interest in minerals in the place of

investment therein or secured by operating or
contract agreement for which income is derived,
and return of capital expected, from the extraction
of mineral.

Charitable and Other Contributions

Q: What are the requisites for its deductibility?

A: AW-SEA
1. The contribution or gift must be Actually
paid;
2. It must be paid Within the taxable year;
3. It must be given to the organization
Specified by law;
4. It must be Evidenced by adequate
receipts or records; and
5. The amount of charitable contribution of
property other than money shall be based
on the Acquisition cost of said property.

Q: What contributions are deductible in full?

A: These are: [GAFA]

1. Donations to the Government of the
Philippines, or political subdivisions
including fully-owned government
corporation to be used exclusively in
undertaking priority activities in:
[CHEESHY]
a. Culture
b. Health
c. Economic Development
d. Education

e. Science
f. Human Settlement
g. Youth and Sports development

2. Donations to Foreign institutions and

international organizations in compliance
with treaties and agreements with the
Government.

3. Donations to Accredited NGO s

a. Exclusively for: C2HES2Y-RC
i. Cultural
ii. Charitable
iii. Health
iv. Educational
v. Scientific
vi. Social welfare
vii. Character building &
Youth and Sports Development
viii. Research
ix. Any Combination of the above
b. Donation must be utilized not later
than the 15th day of the 3rd month
following the close of taxable year;
c. Administrative expense must not
exceed 30% of the total expenses;
d. Upon dissolution, assets shall be
transferred to another non-profit
domestic corporation or to the
State.

4. Donations of prizes and awards to

Athletes (Sec. 1, RA 7549)

Q: What donations are subject to limitation?

A:
1. Donations that are not in accordance with
the priority plan.
2. Donations whose conditions are not
complied with.
3. Donations to the Government of the
Philippines or political subdivision
exclusive for public purposes.
4. Donations to domestic corporations
organized exclusively for:
a. Scientific
b. Educational
c. Cultural
d. Charitable
e. Religious
f. Rehabilitation of veteran
g. Social Welfare

Q: What are the limitations?

A:
1. Amount deductible shall not exceed:
a. For individuals - 10% of taxable
income before contributions;
b. For corporations - 5% of taxable
income before contributions. (Sec.
34 H [1], NIRC)

2. No part of net income of donee inures to

the benefit of any private stockholders or
individual.

Q: Are the following expenses deductible from

gross income:
1) Employer s contribution to the Christmas
fund of his employees
2) Contribution to the construction of a chapel
of a university that declares dividends to its
stockholders

3) Premiums paid by the employer for the life

insurance of his employees
4) Contribution to a newspaper fund for needy
families when such newspaper organizes a
group of civic spirited citizens solely for
charitable purposes.

A:
1. Yes, under No. 27 RAMO 1-87 subject to
the condition that the contribution does
not exceed month s basic salary of all
the employees. It is part of the ordinary
and necessary expenses.
2. No, part of the net income of the
university inures to the benefit of its
private stockholders. (Sec. 34 [H], NIRC)
3. No, for the beneficiary is the employer
(Sec. 36 A [4], NIRC)
4. No, contributions to a newspaper fund
for needy families are not deductible for
the reason that the income inures to the
benefit of the private stockholder of the
printing company. (1968 Bar Question)

Q: On Dec. 06, 2001, LVN Corp. donated a piece of

vacant lot situated in Mandaluyong City to an
accredited and duly registered non-stock, nonprofit educational institution to be used by the
latter in building a sports complex for students.

May the donor claim in full as deduction from its

gross income for the taxable year 2001 the
amount of the donated lot equivalent to its fair
market value/zonal value at the time of the
donation?

A: No, donations and/or contributions made to

qualified donee institutions consisting of property
other than money shall be based on the acquisition
cost of the property. The donor is not entitled to
claim as full deduction the fair market value/zonal
value of the lot donated. (Sec. 34 [H], NIRC) (2002
Bar Question)

Q: The Filipinas Hospital for Crippled Children is a

charitable organization. X visited the hospital and

gave P100,000 to the hospital and P5,000 to a

crippled girl whom he particularly pitied. A
crippled son of X is in the hospital as one of its
patients. X wants to exclude both the P100,000
and the 5,000 from his gross income. Discuss.

A: If X is earning from compensation income, he

could not deduct either the P100,000 and the
P5,000. If he is earning from trade or business, he
could deduct the P100,000 if the hospital is
accredited as a donee institution. If not, then no
deduction is allowed.

However, he could not deduct the P5,000 because

to qualify for exemption, the charitable
contribution must be given to accredited
organizations or associations. (Sec. 34 H [1], NIRC)
(1993 Bar Question)
Q: On the part of the contributor, are
contributions to a candidate in an election
allowable as a deduction from gross income?

A: The contributor is not allowed to deduct the

contributions because the said expense is not
directly attributable to the development,
management and/or operation and/or conduct of
trade or business or profession. (1998 Bar
Question)

Research and Development Expenditure

Q: How may a taxpayer treat research and

development costs?
A: Taxpayer may either treat it as:
1. Revenue Expenditure
it will be wholly
deducted as ordinary and necessary
expense in the year it is paid or incurred
2. Deferred Expense
allowed as deduction
ratably distributed over a period of at
least 60 months starting from the month
benefits are received from such
expenditure. (Sec. 34 I [1 and 2], NIRC)

Q: What are those research and development

expenditures which are not deductible?

A: Any expenditure:
1. For the acquisition or improvement of
land or for the improvement of property
to be used in connection with research
and development subject to depreciation
and depletion; and
2. Paid or incurred for the purpose of
ascertaining the existence, location,
extent or quality of any deposit of ore or
other mineral including oil or gas. (Sec. 34
I [3], NIRC)

Pension Trust Contributions

Q: When can an employer claim as deduction the

payment of reasonable pension?

A: If the employer contributes to a private pension

plan for the benefit of its employee.

Q: What are the requisites for its deductibility?

A: P-FRANC
1. The employer must have established a
Pension or retirement plan to provide for
the payment of reasonable pensions to
his employees;
2. It must be Funded by the employer;
3. The pension plan is Reasonable and
actuarially sound;
4. The deduction is Apportioned in equal
parts over a period of 10 consecutive
years beginning with the year in which
the transfer or payment is made;
5. The payment has Not yet been allowed
as a deduction; and
6. The amount contributed must no longer
be subject to the Control and disposition
of the employer;
OPTIONAL STANDARD DEDUCTION

Q: What is optional standard deduction (OSD)?

A: The OSD is a scheme whereby a taxpayer is given

the option to deduct from his gross revenue or
gross income a lump sum equivalent to a
percentage of such gross revenue or gross income
for purposes of computing the net taxable income
on which the income tax rate will be applied.

Note: This is in lieu of the itemized deduction where

the taxpayer lists down all his expenses and the
corresponding amounts incurred to determine the
amount of allowable deductions.

Q: How much is allowed as OSD?

A: The optional standard deduction is an amount

not exceeding:
1. 40% of the gross sales or gross receipts of
a qualified individual taxpayer; or
2. 40% of the gross income of a qualified
corporation. (Sec. 34 [L], NIRC)

Note: It should be emphasized that the cost of sales

in case of individual seller of goods, or the cost of
service in case of individual seller of services, is not
allowed to be deducted for purposes of determining
the basis of the OSD pursuant to RA 9504 (RR No. 162008)

Note: Under RA 9504, the 10% OSD allowed to an

individual taxpayer engaged in business and practice of
profession was increased to 40% of gross sales or
receipts. Furthermore, corporations subject to the
regular corporate income tax under Secs. 27 A and 28
A [1] of the NIRC are now given the option to avail the
OSD at 40% of gross income.

Q: Differentiate itemized deduction from OSD.

A: Itemized Deduction must be substantiated by

receipts while OSD requires no proof of expenses
incurred because the allowable deduction is 40% of
gross sales or receipts or gross income as the case
may be.

Q: Who may elect an OSD?

A:
1.
a.
b.
c.

Individuals
Resident citizens
Non-resident citizens
Resident aliens

2. Corporations
a. Domestic
b. Resident foreign corporations
3. Estates

4. Trusts

Note: The taxpayer must signify his intention in his

income tax return which shall be irrevocable for the
taxable year for which the return is made.

Q: Who may not avail of the OSD?

A:
1. Non-resident aliens whether or not
engaged in trade or business in the
Philippines; and
2. Non- resident foreign corporations.

Q: How is OSD determined with respect to GPP

and the partners thereof?

A:
1. If the GPP avails of itemized deductions
under Sec. 34 of the NIRC in computing
net income, the partners may still claim
itemized deductions on their net
distributive share that have not been
claimed by the GPP;

2. The partners, however, are not allowed to

claim OSD on their share of net income
because the OSD is a proxy for all items of
deductions allowed in arriving at taxable
income;

3. If the GPP avails of OSD in computing net

income, the partners may no longer claim
further deductions from their net
distributive share, whether itemized or
OSD;

4. The election to claim either the OSD or

itemized deductions must be signified in
the income tax return filed for the first
quarter of the taxable year; once the
election is made, the same type of
deduction must be consistently applied
for all succeeding quarters and in the
annual income tax return; and

5. A taxpayer who is required but fails to file

the quarterly income tax return for the
first quarter shall be deemed to have
elected to avail of itemized deductions for
the taxable year. (RR No. 2-2010)

PERSONAL AND ADDITIONAL EXEMPTIONS

Q: What are personal exemptions?

A: These are arbitrary amounts allowed as

deductions from gross income of an individual
representing personal, living and family expenses
of the taxpayer.

Q: What are the kinds of personal exemptions?

A:
1. Basic Personal Exemption
the amount
subtracted from gross income which is
allowed for the theoretical personal,
family, and living expenses of an
individual taxpayer regardless of status,
whether single or married individual
judicially decreed as legally separated
with no qualified dependents or head of
the family.

2. Additional Exemptions these are

exemptions in addition to the basic

personal exemptions that are granted to

certain individual who have dependents
that qualify them for this exemption.

Note: RA 9504 increased the basic personal

exemptions to P50,000 irrespective of whether
the individual is single, head of the family, or
married. It also increased the additional personal
exemptions to P25,000 for each child provided
not more than 4.

Q: What is the Wisconsin Plan?

A: It is a system which allows the deduction from

gross income of arbitrary amounts for personal,
living or family expenses of the taxpayer.

Q: Who among the individual taxpayer s are

entitled to personal and additional exemptions?

A:
1. Resident citizen
2. Non-resident citizen
3. Resident alien

Q: Is a non-resident alien engaged in trade,

business, or in the exercise of a profession in the
Philippines (NRA-ETB) entitled to personal and
additional exemptions?

A:
GR: No.

XPN: Can be entitled to personal and additional

exemption subject to the rule on reciprocity:
1. His foreign country allows personal
exemptions to citizens of the Philippines

not residing therein;

2. File an accurate return of his income from

all sources within the Philippines. on time;
and
3. Amount allowable is not to exceed our
maximum allowable personal exemption.

Q: Who among the individual taxpayers are not

entitled to personal and additional exemptions?

A:
1. Non-resident alien not engaged in
business
2. Residents aliens and Filipinos employed
by and who receive compensation from:
a. Regional or area headquarter or
regional operating headquarters of
multinational corporation
established in the Philippines;
b. Offshore banking units established
in the Philippines.
c. Petroleum service contractors and
subcontractors in the Philippines.

Note: The above individual taxpayers are not

allowed to enjoy personal exemptions since they
are taxed based on gross incomes. Only
individual taxpayers are entitled to personal and
additional exemptions. Corporations are not
entitled to such exemptions.

Additional Exemptions

Q: What are the conditions for an individual to

be entitled to additional exemptions?

A: An individual:

1. Whether single or married;

2. Shall be allowed an additional exemption
of P 25,000;
3. For each qualified dependent child;
4. Provided, that the total number of
dependents for which additional
exemptions may be claimed as long as it
shall not exceed 4 dependents. (Sec. 35
[B], NIRC)

Q: Who are qualified dependents for purposes of

additional exemption?

A:
1. A dependent means
a. Legitimate, illegitimate or legally
adopted child;
b. Chiefly dependent upon and living
with the taxpayer;
c. If such dependent is:
i. Not more than 21 years old;
ii. Unmarried;
iii. Not gainfully employed or
d. If such dependent:
i. Regardless of age;
ii. Is incapable of self-support;
because of mental or physical
defect. (Sec. 2.79 I [1] b, RR 298 as amended by RR 10-2008;
Sec. 35 [b], NIRC)

2. Under RA 7432 (Senior Citizens Law,) a

senior citizen may qualify as dependents

Note: Parents, as well as brothers or sisters and

other collateral relatives are not qualified
dependents to be claimed as additional
exemptions under RA 9504.

Q: What does

living with the taxpayer

mean?

A: Living with the person, giving support does not

necessarily mean actual and physical dwelling
together at all times and under all circumstances.
Thus, the additional exemption applies even if a
child or other dependent is away at school or on a
visit.

Q: In case of married individuals and both are

working, who is entitled to additional exemptions?

A: Additional exemption for dependents shall only

be allowed to one of the spouses. The husband
shall be the proper claimant unless he explicitly
waives his right in favor of the wife in the
Application for Registration (Sec. 35 [B], NIRC)

Note: Where the spouse is unemployed or is a nonresident citizen deriving income from foreign sources,
the employed spouse within the Philippines shall be
automatically entitled to claim the additional
exemptions for their children.

Q: In case of legally separated spouses, who is

entitled to additional exemptions?

A: Additional exemptions may be claimed only by

the spouse who has custody of the child or children.
(Sec. 35 [B], NIRC)

Q: W, legally separated has 1 child who is 15 years

of age. Will she be entitled to personal additional
exemption?

A: Yes.

Q: Assuming, the child gets married, is W still

entitled to personal exemption?

A: No.

Q: Supposed the child was gainfully employed at

the age of 15, is W still entitled to personal
exemption?

A: No.

Q: The child reached the age of 22, is W still

entitled to personal exemption?

A: It depends, as a rule, the child must not be more

than 21 years old. However, a dependent,
regardless of age, who is incapable of self-support
because of mental or physical defect may qualify as
a dependent.

Note: In case of age requirement there is an

exception, but with regard to marriage and gainful
employment, the NIRC provides no exception.

Q: Who is a senior citizen?

A: Under Sec 2.b, RR 4-2006, implementing the tax

provisions of RA 9257 (Expanded Seniors Citizen
Act of 2003), a senior citizen is any resident Filipino
citizen aged 60 years old and above.

Q: In order that a benefactor may claim a senior

citizen as a dependent, what are the conditions?

A:
1. The senior citizen whose annual taxable
income does not exceed the poverty level
must be dependent upon the benefactor
for chief support;
2. Registered by the benefactor as his
dependent and himself/herself as
benefactor; and
3. In the ITR, the benefactor must indicate
the name, birthday and OSCA ID number
of the senior citizen.

Q: Who is a benefactor?

A: Any person whether related to the senior citizen

or not, who takes care of him/her as a dependent.

Q: Charlie, a widower, has two sons by his

previous marriage. Charlie lives with Jane who is
legally married to Mario. They have a child named
Jill. The children are all minors and not gainfully
employed.
1. How much personal exemption can Charlie
claim?
2. How much additional exemption can Charlie
claim?

A:
1. Charlie may claim the basic personal
exemption (BPE) of P50,000. Under RA
9504, an individual taxpayer may claim
the BPE irrespective of status.

2. His children from his previous marriage

who are legitimate children and his
illegitimate child with Jane will all entitle
him to additional personal exemption of
P25,000 for each dependent, if apart from
being minor and not gainfully employed,
they are unmarried, living with and
dependent upon Charlie for their chief
support. (2006 Bar Question)

Change of Status

Q: What are the rules in case of change of status

during the taxable year?

A:

CHANGE OF
STATUS
TREATMENT
Death of the
taxpayer
Estate may claim the personal
exemption of P50,000. Under RA 9504,
the BPE is fixed at P50,000 irrespective
of status of the taxpayer
Death of the
dependent
Taxpayer is still entitled to additional
exemption
Additional
dependent
Taxpayer is still entitled to additional
exemption
Dependent
becoming
more than 21
years of age
Taxpayer can still claim him or her as
dependent
Marriage of
the taxpayer
Taxpayer entitled to full exemption for
the particular taxable year
Death of
spouse
Surviving spouse may still claim the full
amount of P50,000
Marriage of
Dependent
Taxpayer can still claim him or her as
dependent for the particular taxable
year
Gainful
employment
of dependent
Taxpayer can still claim him or her as
dependent for the particular taxable
year

Q: Mar and Joy got married in 1990. A week before

their marriage, Joy received, by way of donation, a
condominium unit worth P750,000 from her
parents. After the marriage, some renovations
were made at a cost of P150,000. The spouses
were both employed in 1991 by the same
company. On 30 Dec. 1992, their first child was
born, and a second child was born on 07 Nov.
1993. In 1994, they sold the condominium unit and
bought a new unit.

Under the foregoing facts, what were the events in

the life of the spouses that had income tax
incidence?

A: The events in the life of spouses, Mar and Joy,

which have income tax incidence are:
1. Their marriage in 1990 had no effect on
their entitlement to the basic personal
exemption of P50,000 which may be
enjoyed irrespective of the individual
taxpayer s status;
2. Their employment in 1991 by the same
company will make them liable to the
income tax imposed on gross
compensation income;
3. Birth of their first child in 1992 would give
rise to an additional exemption of
P25,000 for taxable year 1992;
4. Birth of their second child in 1993 would
likewise entitle them to claim additional
exemption of P25,000 for 1993. (1997 Bar
Question)

Special Deductions

Q: What are special deductions?

A: These are deductions usually allowed only for

particular business or enterprises and not to others,
or may be allowed for all but are not provided for
under the provisions of the NIRC but under special
laws.

Q: What are the special deductions allowable

under the NIRC?

A:
1. Private Proprietary Educational
Institutions In addition to the expenses
allowed as deduction, it has the option to
treat the amount utilized for the
acquisition of depreciable assets for
expansion of school facilities as:
a. Outright expense (the entire
amount is deducted from gross
income); or
b. Capital asset and deduct only
from the gross income an

amount equivalent to its

depreciation every year. (Sec.
34 A [2], NIRC)

2. Estates and Trusts can deduct the:

a. Amount of income paid,
credited or distributed to the
heirs/ beneficiaries; and
b. Amount applied for the benefit
of the grantor. (Sec. 61, NIRC)

3. Insurance Companies can Deduct:

TYPE OF
INSURANCE
SPECIAL DEDUCTIONS
Non-Life
1. Net additions, if any, required
by law to be made within the
year to reserve funds;
2. Sum paid on the policy within
the year and annuity contracts
other than dividends provided
that the released reserve be
treated as income for the year
of release. (Sec. 3[A], NIRC)
Mutual marine
insurance
1. Amounts repaid to policy
holders on account of
premiums previously paid by
them;
2. Interest paid upon those
amounts between the date of
ascertainment and the date of
its payment. (Sec. 37 [B],
NIRC)
Mutual insurance
mutual fire and
mutual employer s

liability and mutual

workmen s
compensation and
mutual casualty
insurance
1. Portion of the premium
deposits returned to the
policy holders;
2. Portion of the premium
deposits retained for the
payment of losses, expenses
and reinsurance reserve. (Sec.
37[C], NIRC)
Assessment
Insurance
Amount actually deposited with
officers of the Government of the
Philippines pursuant to law as
addition to guarantee or reserve
funds. (Sec. 37[D], NIRC)

Q: What are the deductions from gross income

available under RA 9257 or the Expanded Senior
Citizens Act of 2003?

A:
1. Deductions from gross income of private
establishments for the 20% sales
discounts granted to senior citizens on
the sale of goods and/or services
2. Additional deduction from gross income
of private establishments for
compensation paid to senior citizens

Q: Who could avail of the deduction for the 20%

senior citizens discount?

A:
1. Resident citizens and domestic
corporations; and
2. Non-resident citizens, aliens (whether

residents or not) and foreign

corporations, from their income arising
from their profession, trade or business,
derived from sources within the
Philippines.

Q: What are the establishments that can claim the

discounts granted as deduction?

A:
1. Hotels and similar lodging establishments
2. Restaurants
3. Recreation centers
4. Theaters, cinema houses, concert halls,
circuses, carnivals and other similar places
of culture, leisure and amusement
5. Drug stores, hospitals, pharmacies,
medical ad optical clinics and similar
establishments dispensing medicines
6. Medical and dental services in private
facilities
7. Domestic air and sea transportation
companies
8. Public land transportation utilities
9. Funeral parlors and similar
establishments

Q: What are the conditions in order for

establishments to avail the 20% sales discounts as
deduction from gross income?

A:
1. Only that portion of the gross sales
exclusively used, consumed or enjoyed by
the senior citizen shall be eligible for the
deductible sales discount;
2. The gross selling price and the sales
discount must be separately indicated in
the official receipt or sales invoice issued
by the establishment from the sale of
goods or services to the senior citizen;
3. Only the actual amount of the discount on
a sales discount not exceeding 20% of the
gross selling price can be deducted from
the gross income, net of value-added tax,
if applicable, for income tax purposes,
and from gross sales or gross receipts of
the business enterprise concerned, for
VAT or other percentage tax purposes;
4. The discount can only be allowed as
deduction from gross income for the
same taxable year that the discount is
granted; and
5. The business establishment giving sale
discounts to qualified senior citizens is
required to keep separate and accurate

record of sales, which shall include the

name of the senior citizen, OSCA ID, gross
sales/receipts, sales discounts granted,
dates of transaction and invoice number
for every sale transaction to senior
citizen. (Sec. 8 [1] to [5], RR No. 4-2006)

Q: When may the additional deduction from gross

income of private establishments for
compensation paid to senior citizens be availed?

A: Private establishments employing senior citizens

shall be entitled to additional deduction from their
gross income equivalent to 15% of the total amount
paid as salaries and wages to senior citizens
provided the following are present:
1. Employment shall have to continue for a
period of at least 6 months;
2. Annual taxable income of the senior
citizen does not exceed the poverty level
as may be determined by the NEDA thru
the National Statistical Coordination
Board (NSCB). For this purpose, the senior
citizen shall submit to his employer a
sworn certification that his annual taxable
income does not exceed the poverty
level. (Sec. 9, RR 4-2006)

Note: Poverty Level/treshold is the the

minimum income/expenditure required for
a family/individual to meet the basic food
and non-food requirements as defined by
the NSCB. (for an individual it is P974 and
P1,403 while for a family it is P4,869 and
P7,017 as of the year 2009)

Q: What deduction may be availed of under RA

9999, otherwise known Free Legal Assistance Act
of 2010?

A: A lawyer or professional partnerships rendering

actual free legal services, as defined by the SC, shall
be entitled to an allowable deduction from the
gross income.

Note: Deduction would be the amount that could have

been collected for the actual free legal services
rendered or up to 10% of the gross income derived
from the actual performance of the legal profession,
whichever is lower.

Q: What is the condition for it to be availed of as a

deduction from gross income?

A: It shall be deductible provided that the actual

free legal services contemplated shall be exclusive
of the minimum 60-hour mandatory legal aid
services rendered to indigent litigants as required
under the Rule on Mandatory Legal Aid Services for
Practicing Lawyers, under BAR Matter No. 2012,
issued by the SC.

*See discussion on Exempt Corporations.

Items not Deductible

Q: What items are not deductible?

A: In computing net income, no deduction shall in

any case be allowed in respect to:
1. Personal, living or family expenses
these
are personal expenses and not related to
the conduct of trade or business

2. Any amount paid out for new buildings of

for permanent improvements, or
betterments made to increase the value
of any property or estate
these are
capital expenditures added to the cost of
the property and the periodic
depreciation is the amount that is
considered as deductible expense

Note: Shall not apply to intangible drilling

and development costs incurred in
petroleum operations which are deductible
under Subsection (G) (1) of Sec. 34 of the
NIRC

3. Any amount expended in restoring

property or in making good the
exhaustion thereof for which an
allowance is or has been made

4. Premiums paid on any life insurance

policy covering the life of any officer or
employee, or of any person financially
interested in any trade or business carried
on by the taxpayer, individual or
corporate, when the taxpayer is directly
or indirectly a beneficiary under such
policy (Sec. 36 [A], NIRC)

5. Losses from sales or exchanges of

property between related parties (Sec. 36

[B], NIRC)

6. Interest expense, bad debts, and losses

from sales of property between related
parties

7. Non-deductible interest

8. Non-deductible taxes

9. Non-deductible losses

10. Losses form wash sales of stock or

securities

Q: When is a person financially interested in the

taxpayer s business?

A: If he is a stockholder thereof or he receives as

compensation his share of the profits of the
business.

INCOME TAXATION ON INDIVIDUALS

Q: Give the general principles of income taxation

on individuals.

A: Except when otherwise provided in the NIRC:

1. A citizen of the Philippines residing
therein is taxable on all income derived

from sources within and without the

Philippines;

2. A non-resident citizen is only taxable on

income derived from sources within the
Philippines

3. An individual citizen of the Philippines

who is working and deriving income from
abroad as an OFW is taxable only on
income derived from sources within the
Philippines: Provided, that a seaman who
is a citizen of the Philippines and who
receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged
exclusively in international trade shall be
treated as an OFW

4. An alien individual, whether a resident or

not of the Philippines, is taxable only on
income derived from sources within the
Philippines (Sec. 23, NIRC)

INDIVIDUAL
TAXPAYER IS A:
INCOME DERIVED FROM
SOURCES
Within the
Philippines
Outside the
Philippines
Resident Citizen
v
v
Non-resident Citizen
x
v

Alien (whether
resident or not)
x
v

Q: How are individuals taxed?

A:
1. Taxable income subject to graduated
Rates - applies to:
a. Resident citizens (RC);
b. Non-resident citizens (NRC) including
OCW
c. Resident alien (RA)
d. Non-resident alien engaged in trade
or business (NRA- ETB)

2. Gross income Subject to final tax rate of

25% - applies only to non-resident not
alien engaged in trade or business (NRANETB)

Q: What is taxable income?

A: The term taxable income means the pertinent

items of gross income specified in the NIRC, less the
deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by the NIRC or other special laws.

Q: What are the incomes subject to graduated

rates?

A:
1. Compensation Income:
a. Monetary Compensation: regular
salary or wage, separation pay or
retirement benefit not otherwise
exempt, bonuses, 13th month pay
and other benefits not exempt,
director s fees;
b. Non-monetary Compensation: fringe
benefit not subject to tax
2.
3.
4.
5.

Business and Professional Income

Capital Gain not subject to capital gain tax
Passive Income not subject to final tax
Other Income

Q: What is the formula in determining taxable

income?

A:
Gross Compensation Income xxx
Less: Personal exemptions (xxx)
Premium payment on health

and/or Hospitalization insurance (xxx)

Net Compensation Income xxx
Add: Net business income or xxx
Net professional income xxx
Other income xxx
Taxable income
subject to graduated rates xxx

Q: What are the graduated rates applicable to the

income of individuals?

A:
Income Bracket
Applicable Tax Rate
Not over P10,000
5%
+
Over
P10,000
but not
over
P30,000
P500
+
10% of the
excess over
P10,000
Over
P30,000
but not
over
P70,000
P2,500
+

15% of the
excess over
P30,000

Over
P70,000
but not
over
P140,000
P8,500
+
20% of the
excess over
P70,000
Over
P140,000
but not
over
P250,000
P22,500
+
25% of the
excess over
P140,000
Over
P250,000
but not
over
P500,000
P50,000
+
30% of the
excess over
P250,000
Over P500,000
P125,000
+
32%

(Sec. 24 A [2], NIRC)

Q: Assuming X, a resident citizen, married and has

4 qualified dependents. He earns a monthly
compensation income of P25,000. In 2009, he
earned P150,000 as net income from his retail
business. How much is his taxable income for the
year 2009?

A: X s taxable income for the year 2009 is P300,000

computed as follows:

Gross Income (P25,000 x 12) P300,000

Less: Basic Personal exemptions (50,000)
Additional Exemption (25K x 4) (100,000)
Premium payment on health
and/or Hospitalization insurance ------------

Net Compensation Income 150,000

Add: Net business income 150,000

Taxable income subject to

graduated rates P300,000

Note: Premium payment on health and/or

hospitalization insurance cannot be availed since the
family gross income is more than P250,000 for the
taxable year.

Q: How much is his income tax payable?

A: From the taxable income of P300,000, the

applicable rate is:

Over P250,000 but not

over P500,000
P50,000+30% of the
excess over P250,000

Thus, the income tax payable is:

Over 250,000 P50,000
Excess x 30% (50,000 x 30%) 15,000
INCOME TAX PAYABLE P65,000
Q: Assume that X is a non-resident alien not
engaged in trade or business. He earned gross
income in the amount of P1.5 million from his onenight concert in the Philippines. How much will he
pay as income tax?

A: Since X is a non-resident alien not engaged in

trade or business, his gross income within the
Philippines is subject to 25% final tax and is not
allowed any deductions. Accordingly he must pay
P375,000 (1,500,000 x 25%)

Fringe Benefits Tax

Q: Define fringe benefit.

A: Fringe benefit is any good, service or other

benefit furnished or granted by an employer in cash
or in kind in addition to basic salaries, to an
individual employee, except a rank and file
employee, such as but not limited to:
[HEV-HIM-HEEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver
and others
5. Interest on loans at less than market rate
to the extent of the difference between
the market rate and the actual rate
granted
6. Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs or
other similar organizations
7. Holiday and vacation expenses
8. Expenses for foreign travel
9. Educational assistance to the employee or
his dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows. (Sec. 33
[B], NIRC; Sec. 2.33 [B], RR 3-98)

Q: What is fringe benefit tax (FBT)?

A: It is a final withholding tax imposed on the

grossed-up monetary value (GMV) of fringe benefit
furnished, granted or paid by the employer to the
employee, except rank and file employees. (Sec.
2.33 [A], RR 3-98)

Note: GMV represents the whole amount of income

realized by the employee which includes the net
amount of money or net monetary value of property
which has been received plus the amount of FBT
thereon otherwise due from the employee but paid by
the employer for and in behalf of his employee. (Sec.
2.33, RR 3-98)

Q: How is the GMV determined?

A: It shall be determined by dividing the monetary

value of the fringe benefit by the grossed-up
divisor. The grossed up divisor is the difference
between 100% and the applicable rates.

Thus:
EMPLOYEE
GROSSED UP
DIVISOR
RATE
Citizen, RA,NRA-ETB
68%
32%
FBT
NRA-NETB
75%
25%
FBT

Individual employed by:

RHQ or RAHQ; OBU; Foreign
service contractor or foreign
service sub-contractor
engaged in petroleum
operations in the Philippines
85%
15%
FBT

Q: How is the monetary value of a fringe benefit

computed?

A: The computation of the FBT is done by:

1. Evaluating the benefit granted; and
2. Determining the proportion or
percentage of the benefit which is
subject to the FBT.

Q: Discuss the valuation of fringe benefits.

A: If the fringe benefit is granted or furnished in:

1. Money or is directly paid by the employer
the value is the amount granted or
paid.
2. Property or other than money and
ownership is transferred to the employee
the value of the fringe benefit shall be
equal to the fair market value of the
property as determined in accordance
with the authority of the BIR to prescribe
real property values (zonal valuation.)
3. Property or other than money BUT
ownership is NOT transferred to the
employee
the value of fringe benefit is
equal to the depreciation value of the
property. (Sec 2.33, RR 3-98)

Note: These guidelines are only used in instances

where there are no specific guidelines. For example,
there are specific guidelines for the valuation of real
property and automobiles.

Q: What is the tax treatment of fringe benefits?

A: If the benefit is not tax-exempt and the recipient

is:

1. A rank and file employee

the value of
such fringe benefit shall be considered as
part of the compensation income of such
employee subject to tax payable by the
employee.

2. Where the recipient is not a rank and file

employee
the value shall not be
included in the compensation income of
such employee subject to tax. The fringe
benefit tax is instead levied upon the
employer who is required to pay. (Sec.
33, NIRC)

Q: What are the notable distinctions between

compensation income and fringe benefit?

A:
COMPENSATION INCOME
FRINGE BENEFIT
As part of gross income of an employee
Part of the gross income
of an employee
GR: Not reported as part of
the gross income of an
employee.

XPN: Fringe benefits given to

rank and file employee is
included in his gross income
As to who is liable to pay the tax

Note: The person who is legally required to pay (same as

statutory incidence as distinguished from economic
incidence) is that person who, in case of non-payment,
can be legally demanded to pay the tax.
Employee liable to pay
the tax on his income
earned.
Employer liable to pay the
fringe benefits tax and can be
deducted as business
expense.

Note: The FBT shall be

treated as a final tax on the
employee which shall be
withheld and paid by the
employer on a calendar
quarterly basis. (Sec. 2.33
[A], RR 3-98) Fringe benefits
tax is deductible from the
gross income of the
employer
As to treatment
Subject to creditable
withholding tax
the
employer withholds the
tax upon the payment of
the compensation
income
Subject to final tax

Q: What are the kinds of fringe benefits that are

not subject to the FBT?

A:
1. Fringe benefits which are authorized and
exempted from tax under special laws.
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans.
3. Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not.
4. De minimis benefits as defined in the
rules and regulations to be promulgated
by the Secretary of Finance, upon
recommendation of the CIR.
5. When the fringe benefit is required by
the nature of, or necessary to the trade,
business or profession of the employer.
6. When the fringe benefit is for the
convenience of the employer (Employer s
Convenience Rule) (Sec. 32, NIRC; Sec.
2.33 [C], RR 3-98)

Note: Although a fringe benefit may be

exempted from the FBT, it may still fall under a

different tax under another law, such as the
compensation income tax or the like.

Q: X was hired by Y to watch over Y s fishponds

with a salary of P10,000. To enable him to
perform his duties well, he was also provided a
small hut, which he could use as his residence in
the fishponds. Is the fair market value of the use
of the small hut by X a fringe benefit that is
subject to the 32% tax imposed by Sec. 33 of the
NIRC?

A: No, X is neither a managerial nor a supervisory

employee. Only managerial or supervisory
employees are entitled to a fringe benefit subject
to the FBT. Even assuming that he is a managerial
or supervisory employee, the small hut is provided
for the convenience of the employer, hence does
not constitute a taxable fringe benefit. (Sec. 33,
NIRC) (2001 Bar Question)

Q: Are salaries and wages of managerial or

supervisory employee subject to FBT?

A: No, basic salary is excluded because it is part of

compensation income.

Q: Give the basic rules on FBT.

A:
1. Fringe benefits given to rank and file
employees (whether under a CBA or not)
is not subject to FBT.
2. The fringe benefits given to rank and file
employees are treated as part of his
compensation income subject to income
tax.
3. Fringe benefits given to supervisory or
managerial employees are subject to the
FBT.
4. De minimis benefit, whether given to
rank and file employees or to supervisory

or managerial employees is not subject to

FBT.

Q: What are the situations whereby housing

privilege may be subject to the FBT?

A:
1. Employer leases residential property for
use of the employee;
2. Employer owns a residential property
and assigns the same for the use by the
employee;
3. Employer purchases a residential
property on installment basis and allows
use by the employee;
4. Employee purchases a residential
property and transfers ownership to the
employee;
5. The employee provides a monthly fixed
amount for the employee to pay his
landlord.

Q: What are the housing privileges not treated as

taxable fringe benefit?

A:
1. Housing privilege of military officials of
the Armed Forces of the Philippines
consisting of officials of the Philippine
Army, Philippine Navy, and Philippine Air
Force. (Sec. 2.33 D [1] f, NIRC)

Note: Benefit to said officials shall not be

treated as taxable fringe benefit in
accordance with the existing doctrine that
the State shall provide its soldier with
necessary quarters which are within or
accessible from the military camp so that
they can readily be on call to meet the
exigencies of their military service.

2. A housing unit which is situated inside or

adjacent to the premises of a business of

factory. (Sec. 2.33 D [1] g, RR 3-98)

Note: A housing unit is considered adjacent

to the premises if it is located within the
maximum 50 meters from the perimeter of
the business premises.

Q: When is an expense account treated as taxable

fringe benefit?

A:
GR: Expenses incurred by the employee but
which are paid by his employer shall be treated
as taxable fringe benefits.

XPNs: When the expenditures are:

1. Duly receipted for and in the name of the
employer; and
2. The expenditures do not partake the
nature of personal expense attributable
to the said employee. (Sec. 2.33 D [2] b,
RR 3-98)

Q: What are the situations whereby motor vehicle

or use thereof may be subject to FBT?

A: Employer:
1. Purchases vehicle in employee s name
2. Provides employee cash for vehicle
purchase
3. Purchases car on installment in name of
employee
4. Shoulders a portion of purchase price
5. Owns and maintains a fleet of motor
vehicle for use of business and
employees
6. Leases and maintains a fleet of motor
vehicles for the use of the business and
employees

Q: What household expenses subject to FBT?

A: Expenses of the employee which are borne by

the employer for household personnel, such as
salaries of household help, personal driver of the
employee, or other similar personal expenses
(garbage dues, laundry expenses, etc.) shall be
treated as taxable fringe benefits. (Sec. 2.33 D [4],
RR 3-98)

Q: Give the rules on interest on loan at less than

market rate as taxable fringe benefit.

A: If the employer lends money to his employees:

1. Free of interest; or
2. Rate lower than 12%,
such interest foregone by the employer or the
difference of the interest assumed by the
employee and the rate of 12% shall be treated as
fringe benefit.

The rule shall apply to installment payments or

loans with interest rate lower than 12%. (Sec. 2.33
D [5], RR 3-98)

Q: Give the rules on expenses for foreign travel

as taxable fringe benefit.

A:
GR: Fixed and variable transportation,
representation and other allowances are subject
to FBT.

XPN: If incurred or reasonably expected to be

incurred by employee in the performance of his
duties subject to the following conditions:
1. Ordinary and necessary in the pursuit of
employer s business and paid or incurred
by employee; and
2. Liquidated or substantiated by receipts or
other adequate documentation. (Sec.
2.33 D [7] c, RR 3-98)

Q: Give the rules on educational assistance to the

employee or dependents treated as taxable
fringe benefit.

A:
GR: The cost of the educational assistance to the
employee which is borne by the employer shall
be treated as taxable fringe benefit.

XPN: A scholarship grant shall not be treated as

taxable fringe benefit if:
1. Education/study is directly connected
with employer s trade, business or
profession; and
2. There is written contract that the
employee shall remain employed with
the employer for a period of time
mutually agreed upon by the parties.
(Sec. 2.33 D [9] b, RR 3-98)

Q: Give the rules on life or health insurance

treated as taxable fringe benefit.

A:
GR: The cost of life or health Insurance and other
non-life insurance premiums borne by the
employer are taxable fringe benefits.

XPNs:
1. Contributions of the employer for the

benefit of employee to the SSS, GSIS, or

similar contributions arising from
provisions of any existing law.
2. The cost of premiums borne by the
employer for the group of insurance of
employees. (Sec 2.33 [D] 10, RR 3-98)

Q: Are Stock Options subject to FBT?

A: Yes, the basis is the difference between the fair

market value and the exercise price at the time of
exercise.

Note: Employees
payment for the
employer, which
shares of stock

receive stock options as part of their

services they rendered to their
entitles them to buy their employer s
at an agreed price.

Q: What are those benefits which are considered

necessary to the business of the employer or are
granted for the convenience of the employer?

A:
1. Housing privilege of military officials of
the Armed Forces of the Philippines
consisting of officials of the Philippine
Army, Philippine Navy, and Philippine Air
Force.

2. A housing unit which is situated inside or

adjacent to the premises of a business of
factory. A housing unit is considered
adjacent to the premises if it is located
within the maximum 50 meters from the
perimeter of the business premises.

3. Temporary housing for an employee who

stays in a housing unit for 3 months or
less.

4. The use of aircraft (including helicopters)

owned and maintained by the employer.

5. Reasonable business expenses which are

paid for by the employer for the foreign
travel of his employee for the purpose of
attending business or conventions.

6. A scholarship grant to the employee by

the employer if the education or study
involved is directly connected with the
employer s trade, business or profession,
and there is a written contract between
them that the employee is under
obligation to remain in the employ of the
employer for period of time that they
have mutually agreed upon.

7. Cost of premiums borne by the employer

for the group insurance of his employees.

8. Expenses of the employee which are

reimbursed if they are supported by
receipts in the name of the employer and
do not partake the nature of a personal
expense of the employee

9. Motor vehicles used for sales, freight,

delivery service and other non-personal
uses. (RR 3-98)

Q: What are de minimis benefits?

A: These are facilities or privileges furnished or

offered by an employer to his employees that are
of relatively small value and are offered or

furnished by the employer merely as a means of

promoting the health, goodwill, contentment and
efficiency of his employees.

Q: What are included as de minimis fringe benefits

and give their respective ceiling amounts?

A: As per RR 5-2008, de minimis benefits include:

Monetized unused
vacation leave
credits of
employees
Qualify:
1.
a.
up
b.

Private employees:
Vacation leave - exempt
to 10 days
Sick leave
always taxable

2. Government employees:
Vacation and sick leave are
always tax exempt
regardless of the no. of
days.
Medical cash
allowance to
dependents of
employees
Not exceeding P750 per
semester or P125 per month
Rice subsidy
P1,500 or one sack of 50-kg rice
per month amounting to not
more than P1,500
Uniforms and
clothing
allowances
Not exceeding P4,000 per
annum
Actual medical
benefits
Not exceeding P10,000 per

annum
Laundry allowance
Not exceeding P300 per month
Employee
achievement
awards
e.g. for length of
service or safety
achievement
In the form of tangible personal
property other than cash or gift
certificate with an annual
monetary value not exceeding
P10,000
Gifts given during
Christmas and
major anniversary
celebrations
Not exceeding P5,000 per
employee per annum
Flowers, fruits and
books or similar
items given to
employees under
certain
circumstances
Reasonable value depending
on the employer s capacity
Daily meal
allowance for
overtime work
Not exceeding 25% of the basic
minimum wage

Q: What is the treatment in case of excess of the

de minimis benefits over their respective ceilings
prescribed by the revenue regulation?

A: It shall be considered as part of

under Sec. 32 B [7] e of the NIRC.

other benefits

Note: Under Sec. 32 B [7] e of the NIRC, 13th month

pay and other benefits are excluded from gross income
provided that they do not exceed P30,000. Any excess
thereof is considered part of the compensation income
of an individual.
Q: How de minimis benefits are taxed?

A:
GR: De minimis benefits are not taxable.

XPN: If the total amount of de minimis benefits

exceed the P30,000 limit, the excess shall be
considered as part of the compensation income.

Premiun Payments on Health and Hospitalization

Q: Who may avail of the deduction?

A: Only an individual taxpayer may claim said

deduction. Individual taxpayers whether earning
purely compensation income during the year or
earning business income or in practice of his
profession whether availing of itemized or optional
standard deductions during the year.

In the case of married taxpayers, only the spouse

claiming the additional exemption for dependents
shall be entitled to this deduction. (Sec. 34 [M],
NIRC)

Q: How much is the amount allowed?

A: The amount of premiums not to exceed P2,400

per family or P200 a month paid during the taxable
year for health and/or hospitalization insurance
taken by the taxpayer for himself, including his
family, shall be allowed as deduction from gross
income. (Sec. 34 [M], NIRC)

Q: What are the conditions in order to avail said

deduction?

A:
1. The health and/or hospitalization was
taken by the taxpayer for himself,
including his family; and
2. That said family has a gross income of not
more than P250,000 for the taxable year.

Tax Exempt Individuals

Q: Who are exempted from the payment of

income tax on their taxable income?

A:
1. Minimum Wage Earners

Note: The holiday pay, overtime pay, night shift

differential pay and hazard pay received by such
minimum wage earners shall be exempt from

income tax. (Sec. 24(A)(2), NIRC as amended by

R.A. 9504)

2. Senior Citizens
Provided, that their
annual taxable income does not exceed
the poverty level as determined by the
National Economic Development
Authority (NEDA) for that year. (RA 9527,
Expanded Senior Citizens Act)

Note: Annual taxable income shall refer to the

annual gross compensation, business and other
income received by a resident senior citizen
during each year from all sources as defined in
Sec. 31 of the NIRC.

3. Exemptions granted under international

agreements

Q: How may a senior citizen avail tax exemption?

A:
1. He must be qualified as such by the CIR or
RDO of the place of his residence;
2. He must file an Annual Information
Return indicating that his annual taxable
income does not exceed the poverty
level; and
3. If qualified, his name shall be recorded by
the RDO in the Master List of Tax Exempt
Senior Citizens.

INCOME TAXATION ON CORPORATIONS

Income Taxation of Domestic Corporations

Q: What are the different taxes imposed on

domestic corporations?

A:
1. Normal corporate income tax (NCIT)
2. Minimum corporate income tax (MCIT)
3. Gross income tax (Optional corporate
income Tax)
4. Improperly accumulated income tax
5. Final tax on passive incomes:
a. Interest from deposits and yields and
royalties
b. Capital gains from sale of shares not
traded in the stock exchange
c. Income derived under the expanded
foreign currency deposit system
d. Inter-corporate dividends
e. Capital gains realized from the sale,
exchange or disposition of lands/ or
buildings.

Note: Intercorporate Dividends are not subject to

tax. (Sec. 27 D [4], NIRC)

Normal Corporate Income Tax

Q: How are corporations treated under normal

corporate income tax (NCIT)?

A: Under the normal income tax, the taxable

income of a corporation during each taxable year is
multiplied with the applicable rate of 30%.

Note: The resulting amount should then be compared

with the income tax payable using the MCIT.
Whichever is higher between the two shall be the tax
due.

Q: To what corporations is the NCIT applicable?

A: It is applicable to domestic and resident foreign

corporations.

Minimum Corporate Income Tax

Q: To what corporations is the minimum corporate

income tax (MCIT) applicable?

A: It is applicable to domestic and resident foreign

corporations which are subject to regular income
tax.
Note: Under its charter, Philippine Airlines is exempt
from the MCIT. (CIR v. Philippine Airlines, Inc., GR
180066, July 7, 2009)

Q: What is the treatment under the MCIT?

A: Under the MCIT, tax is imposed on a corporation

at the rate of 2% based on gross income.

Q: What are the instances when the MCIT is

imposed?

A: The MCIT shall be imposed:

1. When there is zero or negative taxable
income; or
2. Whenever the amount of the minimum
corporate income tax is greater than the
normal tax of 30% due on the taxable
income due from the corporation.

Note: The reason for MCIT is to forestall the prevailing

practice of corporations of overstating deductions, in
order to reduce their income tax payments.

Q: What are the limitations on the applicability of

MCIT?

A:
1. MCIT does not apply if the domestic or
resident corporation is not subject to
NCIT.

2. In the case of a domestic corporation

whose operations or activities are partly
covered by the regular income tax system
and partly covered under a special
income tax system, the MCIT shall apply
on operations covered by the regular
income tax system.

3. For resident foreign corporation, only the

gross income sources within the
Philippines shall be considered.

4. MCIT does not apply on the first 3 years

of business operation of a corporation.

Q: What are those corporations which do not fall

within the coverage of MCIT?

A:
1. On Domestic Corporations:
a. Those operating as proprietary
educational institutions subject to
tax at 10% on their taxable income;
b. Those engaged in hospital operations
which are non-profit subject to tax at
10% on their taxable income;
c. Those engaged in business as
depositary banks under the
expanded foreign currency deposit
system subject to final income tax at
10% of such income;
d. Firms that are taxed under a special
income tax regime such as those in
accordance with RA 7916 and 7227
(the PEZA Law and the Bases
Conversion Development Act,
respectively) (Sec. 2.27 E [8], RR 998)

2. On Foreign Corporations:
a. Those engaged in business as
international carrier subject to tax
at 2% of their Gross Philippine
Billings ;
b. Those engaged in business as
offshore banking unit;
c. Those engaged in business as
regional operating headquarters
subject to tax at 10% of their taxable
income;
d. Firms that are taxed under a special
income tax regime such as those in
accordance with RA 7916 and 7227
(the PEZA law and the Bases
Conversion Development Act,
respectively).

Note: MCIT does not apply to the foregoing

since they are not subject to the NCIT.

Q: What is gross income for purposes of MCIT?

A:
1. As to sale of goods it shall mean gross
sales less sales returns, discounts and
allowances and cost of goods sold.

2. As to sale of services
it shall mean gross
receipts less sales returns, allowances,
discounts and cost of services.

Q: When does MCIT commence?

A: MCIT is imposed beginning the fourth taxable

year in which such corporation commenced its

business operations, which is the year when the

corporation registers with the BIR and not when the
corporation started its commercial operation. (Sec.
27 E [1], NIRC)

Q: Can the payment of MCIT be suspended?

A: Yes. The Secretary of Finance, upon

recommendation of the BIR, may suspend the
imposition of MCIT on any corporation which
suffers loss on account of: [PFL]
1. Prolonged Labor Dispute
arising from a
strike staged by the employees which lasted
for more than 6 months within a taxable
period and which has caused the temporary
shutdown of business operations.

2. Force Majeure a cause due to an

irresistible force as by Act of God like
lightning, earthquake, storm, flood and the
like. It shall also include armed conflicts like
war or insurgency.

3. Legitimate Business Reverses include

substantial losses due to fire, theft or
embezzlement or for other economic
reason as determined by the Secretary of
Finance. (Sec. 27 E [3], NIRC)

Q: When is MCIT reported and paid?

A: MCIT shall likewise apply to the quarterly

corporate income tax but the final comparison
between the NCIT due and the MCIT shall be made
at the end of the taxable year taking into
consideration quarterly tax payment made. (RR 122007)

Q: Can the company claim the MCIT it paid as a

deduction from gross income?

A: No, since MCIT is an estimate of the normal

income tax.

Q: What is the carry-forward provision under the

MCIT?

A: Any excess of MCIT over normal tax (NT) may be

carried forward on an annual basis and be credited
against the NT for the 3 immediately succeeding
years (Sec. 27 E [2], NIRC)

Q: Illustrate the carry-forward provision under the

MCIT.

A:
YR
Normal
Income
Tax
MCIT
TAX
PAYABLE
(whichever
is higher)
EXCESS
of MCIT
over the
Normal
Tax
07
85,000
100,000
100,000

15,000
08
80,000
120,000
120,000
40,000
09
100,000
50,000
100,000

Computation of the Net Amount for the year 2009:

Tax Payable 100,000

Less: 2007 excess MCIT: 15,000
2008 excess MCIT: 40,000
55,000
Net amount of tax payable: 45,000

Note: A corporation shall pay the NT or MCIT

whichever is higher.

In the year 2007, the corporation will pay the MCIT of

P100,000 as its income tax payable since it is greater
than the normal income tax. The excess of MCIT over
the normal tax shall be carried over and shall be
credited against the normal tax for 3 immediately
succeeding years.

In the year 2008, the corporation will also pay the

MCIT for it is greater than the normal tax.

In the year 2009, the corporation will pay the normal

income tax of P100,000. However, the corporation can
credit the MCIT carry-forward of P15,000 and P40,000
for the years 2007 and 2008 respectively, for a total of
P55,000. Thus, the amount of net income tax payable
for the year 2009 is P45,000, i.e., P100,000 less
P55,000.

Q: What are the rules on carry-forward of the

excess MCIT?

A:
1. The excess of MCIT over the NCIT can be
carried forward on an annual or quarterly
basis.
2. The excess can be credited against the
NCIT due in the next 3 immediately
succeeding taxable years.
3. Any excess not credited in the next 3
years shall be forfeited.
4. Carry forward (annually or quarterly) is
possible only if MCIT is greater than NCIT.
5. The maximum amount that can be
credited is only up to the amount of the
NCIT, there can be no negative NCIT.

Q: CREBA assails the constitutionality of MCIT on

the contention that it violates due process. Is the
imposition of MCIT unconstitutional?

A: No, the imposition of MCIT is not violative of due

process for the following reasons:

1. MCIT is imposed on gross income and not

capital. Thus, it is not arbitrary or
confiscatory.

2. It is not an additional tax imposition but is

imposed in lieu of normal net income tax
and only if said tax is suspiciously low.

3. There is no legal objection to a broader

tax base or taxable income resulting from
the elimination of all deductible items
and, at the same time, reduction of the
applicable tax rate. In as much as
deductions are a matter of legislative
grace, Congress has the power to
condition, limit or deny deductions from
gross income in order to arrive at the net
that it chooses to tax. (CREBA, Inc. v.
Romulo, et al., GR 160756, Mar. 9, 2010)

Gross Income Tax

(Optional Corporate Income Tax)

Q: What is

optional corporate income tax ?

A: The President, upon recommendation by the

Secretary of Finance may, effective Jan. 1, 2000,
allow domestic corporations the option to be taxed
at 15% of gross income subject to the following
conditions:
1. A tax effort ratio of 20% of GNP;
2. A ratio of 40% of income tax to total tax
revenue;
3. A VAT tax effort of 4% of GNP;

4. A 0.9% ratio of Consolidated Public Sector

Finance Position to GNP. (Sec. 27 [A], NIRC)

Note: No authority yet has been given by the

President.

Q: When is it available?

A: This optional tax is available only to firms whose

ratio of cost of sales to gross sales/receipts from all
sources does not exceed 55%. The election of the
gross income tax option by the corporation shall be
irrevocable for 3 consecutive taxable years during
which the corporation is qualified under the
scheme. (Sec. 27 [A], NIRC)

Income Taxation of Special

Domestic Corporations

Q: What are the special domestic corporations

under the NIRC?

A: These are the domestic corporations that are

subject to concessionary tax rates that are lower
than those imposed upon ordinary domestic
corporations. Among such special domestic
corporations are:
1. Proprietary educational institutions
2. Non-profit hospitals
3. Insurance companies
4. Depositary banks
5. GOCCs, government instrumentalities or
agencies
6. Franchise holders

Q: How are proprietary educational institutions

and non-profit hospitals treated?

A:
GR: They shall pay a 10% tax on their taxable
income except those passive income covered by
Sec. 27 [D] of the NIRC. (Sec. 27 [B], NIRC)
XPN: They shall pay 30% corporate income tax if
the gross income from unrelated trade, business
or other activity exceeds 50% of the total gross
income derived from all sources.

Q: What does the phrase unrelated trade,

business or other activity means?

A: It means any trade, business or other activity,

the conduct of which is not substantially related to
the exercise or performance by such educational
institution or hospital of its primary purpose or
function.

Q: What is a proprietary educational institution?

A: It is any private school maintained and

administered by private individuals or groups with
an issued permit to operate from the DepEd, CHED
or TESDA as the case may be.

Q: How are insurance companies treated?

A: Special deductions are allowed to insurance

companies under Sec. 37 of the NIRC.

Q: How are depositary banks under the expanded

foreign currency deposit system taxed?

A:
GR: They are exempt from all taxes.

XPNs:

1. Final tax of 10% on interest income from

foreign currency loans granted by such
depositary banks under the expanded
foreign currency deposit system, to
residents other than offshore units in the
Philippines or other depositary banks
under the expanded system.
2. Net income from such transactions as
may be specified by the Monetary Board
to be subject to the regular income tax
payable by banks.

Income Taxation of
Resident Foreign Corporations

Q: What are the classes of taxes imposed on a

resident foreign corporation?

A:
1.
2.
3.
4.

Normal corporate income tax

Minimum corporate income tax
Gross income tax
Final tax on passive Income

a. Interest from deposits and yields and

royalties
b. Capital gains from sale of shares not
traded in the stock exchange
c. Income derived under the Expanded
Foreign Currency Deposit System
d. Inter-corporate dividends
5. Branch profit remittance tax

Branch Profit Remittance Tax

Q: What are branch profits?

A: Branch profits are gains or profits which are

effectively connected with the conduct of trade or
business of a branch in the Philippines.

Q: What is branch profit remittance tax (BPRT)?

A: It is a 15% tax imposed on the profit remitted by

the Philippine branch to its head office. It shall be
based on the total profits applied or earmarked for
remittance without any deduction for the tax
component thereof. (Sec. 28 A [5], NIRC)

Note: To equalize the tax burden on a foreign

corporation maintaining, on the one hand, local branch
offices and on the other hand, subsidiary domestic
corporations where at least majority of all the latter s
shares of stock are owned by such foreign corporation.

Q: What is the Single Entity concept?

A: It is the concept where the head office of a

foreign corporation is the same juridical entity as its
branch in the Philippines.

Q: What is the rule in imposing BPRT?

A:
GR: Any branch remitting profits to its head
office shall be subject to a tax of 15% which
shall be based on the total profits applied or
earmarked for remittance without any
deduction for the tax component thereof
provided that interest dividends received by a
corporation during each taxable year from all
sources within the Philippines shall not be
treated as branch profits.

XPN: It does not find application to activities

registered with the Philippine Economic Zone
Authority. RR 2-98 also exempts enterprises
registered with the Subic Bay Metropolitan
Authority (SBMA) and the Clark Development
Authority (CDA) which are covered under RA
7227.

Q: What remittances are not considered as branch

profits?

A: Interests, dividends, rents, royalties including

remuneration for technical services, salaries, wages,
premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits, income and capital gains received by a
foreign corporation during each taxable year from
all sources within the Philippines shall not be
treated branch profits. (Sec. 2 A [5], NIRC)

Q: When are they considered as branch profits?

A: They shall be considered as branch profit when

they are effectively connected with the conduct of
branch s trade or business in the Philippines.

Income Taxation of Special

Resident Foreign Corporation

Q: What are the special resident foreign

corporations?
A:
1. International carriers
2. Offshore banking units
3. Resident depositary banks
4. Regional or area headquarters of
multinational corporations
5. Regional operating headquarters of
multinational corporations

Q: What is an international air carrier?

A: It is a foreign airline corporation doing business

in the Philippines having been granted landing
rights in any Philippine port to perform
international air transportation service/activities or
flight operations anywhere in the world. (Sec. 2, RR
15-2002)

Q: How is an international carrier taxed?

A: An international carrier doing business in the

Philippines shall pay a tax of 2% on its Gross
Philippine Billings. (Sec 28 A [3], NIRC)

Q: Define Gross Philippine Billings.

A:
1. As to International Air Carrier
It refers to
the amount of gross revenue derived
from carriage of persons, excess baggage,
cargo and mail originating from the
Philippines in a continuous and
uninterrupted flight, irrespective of the
place of sale or issue and the place of
payment of the ticket or passage
document: Provided:
a. That tickets revalidated, exchanged
and/or indorsed to another
international airline form part of the
Gross Philippine Billings if the
passenger boards a plane in a port or
point in the Philippines;
b. That for a flight which originates
from the Philippines, but
transshipment of passenger takes
place at any port outside the
Philippines on another airline, only
the aliquot portion of the cost of the
ticket corresponding to the leg flown
from the Philippines to the point of
transshipment shall form part of
Gross Philippine Billings.

2. As to International Shipping
It means
gross revenue whether for passenger,
cargo or mail originating from the
Philippines up to final destination,
regardless of the place of sale or
payments of the passage or freight
documents.

Q: Does the absence of flight operations within the

Philippine territory render the income received by
an international air carrier income outside the
Philippines?

A: No, a foreign airline company selling tickets in

the Philippines through their local agents shall be
considered as resident foreign corporation engaged
in trade or business in the country. The absence of
flight operations within the Philippines cannot alter
the fact that the income received was derived from
activities within the Philippines. The test of
taxability is the source, and the source is that
activity which produced the income. (Air Canada v.
CIR, CTA Case No. 6572, Dec. 22, 2004)

Note: If an international air carrier maintains flights to

and from the Philippines, it shall be taxed at the rate of
2% of its Gross Philippine Billings, while international
air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other
activities in the country will be taxed at the normal
rate of 30% of such income. (South African Airways v.
CIR, GR 180356, Feb. 16, 2010)

Q: How are offshore banking units (OBU) taxed?

A: Income derived by offshore banking units

authorized by the BSP to transact business with
offshore banking units, including any interest
income derived from foreign currency loans granted
to residents, shall be subject to a 10% final income
tax. (Sec. 28 A [4], NIRC)

Q: Define regional or area headquarters (RAHQ).

A: It is a branch established in the Philippines by

multinational companies and which headquarters
do not earn or derive income from the Philippines
and which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries,
or branches in the Asia-Pacific Region and other
foreign markets.

Q: How are they taxed?

A: They shall not be subject to income tax.

However, they are subject to real property tax on
land improvements and equipment. (Sec. 28 A [6]
a, NIRC)

Note: RAHQs are not subject to income tax for they do

not earn or derive income. They only act as
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the AsiaPacific Region and other foreign markets.

Q: Define regional operating headquarters

(ROHQ).

A: It is a branch established in the Philippines by

multinational companies which are engaged in any
of the following services:
1. General administration and planning
2. Business planning and coordination
3. Sourcing and procurement of raw
materials and components
4. Corporate finance advisory services
5. Marketing control and sales promotion
6. Training and personnel management
7. Logistic services
8. Research and development services and
product development
9. Technical support and maintenance
10. Data processing and communications
11. Business development

Q: How are ROHQ taxed?

A: They shall pay a tax of 10% of their taxable

income within the Philippines.

Q: What are the special resident foreign

corporations and how are they taxed?

A:
SPECIAL RFC
TAX BASE
TAX
RATE
International
Carriers
Gross Philippine Billings
2%
Offshore
banking units
Interest income derived from
foreign currency loans granted
to residents other than OBU or
local commercial banks
including local branches of
foreign banks authorized by
the BSP to transact w/ OBUs
10%
Resident
depositary
banks
Interest income derived from
foreign currency loans granted
to residents other than
offshore units in the
Philippines or other banks
under the expanded system
10%
RAHQ
Not subject to income tax
ROHQ

Taxable income within the

Philippines
10%

Income Tax on Non-resident

Foreign Corporation

Q: What are the taxes imposed on a non-resident

foreign corporation (NRFC)?

A:
1. Gross Income Tax
A foreign corporation
not engaged in trade or business in the
Philippines shall pay a tax equal to 30% of
the gross income during such taxable year
from all sources within the Philippines
except capital gains from sale of shares of
stock not traded in the stock exchange
(Sec. 28 B [1], NIRC)

2. Interest on Foreign Loans A final

withholding tax of 20% on the amount of
interest on foreign loans contracted on or
after Aug. 1, 1986 (Sec. 28 B [5] a, NIRC)

3. Intercorporate Dividends
A final
withholding tax on intercorporate
dividends at the rate of 15% on the
amount of cash and/or property dividends
received from a domestic corporation (Sec.
28 B [5] b, NIRC)

Note: The 15% tax on intercorporate

dividends shall be collected and paid subject
to the condition that the country in which the
non-resident foreign corporation is domiciled
shall allow a credit against the tax due from
the non-resident foreign corporation taxes
deemed to have been paid in the Philippines
equivalent to 15%, which represents the
difference between the regular income tax of
30% and the 15% tax on dividends.

4. Capital Gains from Sale of Shares of Stock

not Traded in the Stock Exchange A final
tax at the rates prescribed below from the

sale, barter, exchange or other disposition

of shares of stock not traded in the stock
exchange (Sec. 28 B [5] c, NIRC)

Not over P100,000....................................... 5%

On any amount in excess of P100,000

. 10%

Q: Maru Corp. is a foreign corporation duly

organized and existing under the laws of Japan
and duly licensed to engage in business under
Philippine laws. Atlantic Gulf and Pacific Co. of
Manila (AGP) declared and paid cash dividends to
petitioner and withheld the corresponding final
dividend tax thereon. Subsequently, Maru claimed
for the refund or issuance of a tax credit
representing profit tax remittance erroneously
paid on the dividends remitted by AGP. Maru
contends that it is a resident foreign corporation
subject only to the 10% intercorporate final tax on
dividends received from a domestic corporation in
accordance with Sec. 24 c [1] of the NIRC. Is the
contention of Maru correct?

A: No, the dividend income remitted to Maru

arising from its equity investments in AGP of Manila
is considered separate and distinct income from the
branch office in the Philippines. There can be no
other logical conclusion that the investment was
made for purposes peculiarly germane to the
conduct of the corporate affairs to Maru, but
certainly not of the branch in the Philippines. (CIR v.
Marubeni, GR 137377, Dec. 18, 2001)

Tax Sparing Rule for NRFC

Q: What is the Tax Sparing Rule for NRFC?

A: When a NRFC receives dividend from a DC, the

dividend income is taxable. The 30% corporate
income tax goes down to 15% if the foreign
government shall allow a credit against the tax due
from the foreign corporation taxes deemed to have
been paid.

Q: Does the phrase deemed paid tax credit mean

tax credit actually granted by the foreign
corporation?

A: There is no statutory provision or revenue

regulation requiring actual grant as long as the
foreign government allows such tax credit. (CIR v.
Wander Philippines, GR L-68375, Apr. 15, 1988)

Q: If it is taxable, is it subject to corporate final tax

(FT) or regular corporate rate?

A: The tax rate is in the nature of a FT. Since it is a

FT, the source which is the DC is considered as the
withholding agent of the Government therefore it is
the one who is legally obliged to pay the tax.

Note: This is to encourage foreign investments and to

attract foreign investors.

Q: Wander Inc. is a DC owned by Glaro Ltd.

(Switzerland) - a foreign service corporation not
engaged in trade or business in the Philippines.
Wander remits dividends to its parent company
out of which Wander withholds 35% and pays the
same to the BIR. Wander filed a claim for refund,
contending that it is liable only for 15%
withholding tax and not 35% as provided in the
NIRC. Is Wander entitled to the preferential rate of

15% withholding tax on the dividends it remitted

to Glaro?

A: Yes, under the NIRC, dividends received from a

domestic corporation is liable to tax, the tax rate
shall be 15% of the dividends remitted, subject to
the condition that the country in which the nonresident corporation shall allow a credit against the
tax due from the non-resident corporation taxes
deemed to be paid in the Philippines equivalent to
20% which represents the difference between the
regular tax of 35% on corporations and 15% tax on
dividends.

In the instant case, Switzerland did not impose any

tax on dividends received by Glaro. Such fact,
however, should be considered as a full satisfaction
of the given conditions. To deny Wander to
withhold the 15% tax would run counter to the very
spirit and intent of said law. (CIR v. Wander
Philippines Inc., GR L-68375, Apr. 15, 1988)

Note: The NCIT rate at the time the case was decided
was still 35% now it is 30%.

Income Taxation of Special NRFC

Q: What are the special NRFC and how are they

taxed?

A:
SPECIAL NFRC
TAX BASE
TAX
RATE
Non-resident
cinematographic
film owner, lessor
or distributor
Gross income from

all sources within the

Philippines
25%
Non-resident
owner or lessor of
vessels chartered
by Philippine
Nationals
Gross rentals, lease
or charter fees from
leases or charters to
Filipino citizens or
corporations, as
approved by the
Maritime Industry
Authority
4%
Non-resident
owner or lessor of
aircraft,
machineries and
other equipment.
Rentals, charters and
other fees derived
from lease of
aircraft, machineries
and other equipment
7%

Improperly Accumulated Earnings Tax

Q: What is an improperly accumulated earnings

tax (IAET)?

A: A tax equivalent to 10% of improperly

accumulated income. (Sec. 29 [A], NIRC)

Q: What is improperly accumulated income?

A: Improperly accumulated earnings refer to profits

of a corporation that are accumulated instead of
distributing it to its shareholders for the purpose of
avoiding the income tax with respect to its
shareholders or the shareholders of another
corporation.

Note: If the earnings and profits were distributed, the

shareholders would be liable for income tax, whereas
if there is no distribution, they would incur no tax with
respect to the undistributed earnings of the
corporation. Hence, IAET is imposed:
1. In the nature of a penalty to the corporation for
the improper accumulation of its earnings; and
2. As a form of deterrent to the avoidance of tax
upon shareholders who are supposed to pay
dividends tax on the earning distributed to them
by the corporation

Q: To whom is it imposed?

A: Upon a domestic corporation and closely-held

corporations which is formed or availed of for the
purpose of avoiding the income tax with respect to
its shareholders or the shareholders of any other
corporation by permitting earnings and profits to
accumulate instead of dividing or distributing it.

Note: IAET does not apply to the following:

1. Publicly-held corporations (Sec. 29 B [2], NIRC)
2. Banks, other non-bank financial intermediaries
3. Insurance companies
4. Publicly-held corporations
5. Taxable partnerships
6. General professional partnerships
7. Non- taxable joint ventures
8. Enterprises duly registered with the Philippine
Economic Zone Authority under R.A. 7916, and
enterprises registered pursuant to the Bases
Conversion and Development Act of 1992 under
R.A. 7227, as well as other enterprises duly
registered under special economic zones declared
by law which enjoy payment of special tax rate on
their registered operations or activities in lieu of
other taxes, national or local. (Sec. 4, RR 2-2001)

Q: What are closely-held corporations?

A: A corporation where at least 50% of the

outstanding capital stock in value or at least 50% of
the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly
by or for not more than 20 individuals. (Sec. 4, RR 22001)

Q: When is an accumulation of earnings

reasonable?

A: If it is necessary for the purpose of the business,

considering all the circumstances of the case. The
term reasonable needs of the business is
construed to mean the immediate needs of the
business, including reasonable anticipated needs.
(Sec. 29 [E], NIRC)

Q: What is the test in determining reasonable

needs which is recognized by the BIR?

A: Under the Immediacy test which is recognized

by the BIR, the reasonable needs of the business
are the immediate and reasonably anticipated
needs supported by a direct correlation of
anticipated needs to such accumulation of profits.

Q: What are the prima facie instances of

accumulation of profits beyond the reasonable
needs of a business?

A:
1. Investment of substantial earnings and
profits of the corporation in unrelated
business or in stock or securities unrelated
business.
2. Investment in bonds and other long term
securities.
3. Accumulation of earnings in excess of 100%
of paid up capital, not otherwise intended
for the reasonable needs of the business.

Q: What are prima facie evidence to show purpose

of accumulation is tax evasion or determination of
purpose to avoid the tax?

A: The fact that:

1. Any corporation is a mere (a) holding
company or (b) investment (mutual fund)
company.

2. The earnings or profits of a corporation

are permitted to accumulate beyond the
reasonable needs of the business.

Q: What is a holding company and an Investment

company?

A:
1. Holding company
One having practically
no activities except holding property and
collecting income therefrom or investing
therein.
2. Investment company
When activities of
the company further include or consist
substantially of buying and selling stocks,
securities, real estate, or other
investment properties so that income is
derived not only from investment yield
but also from profits upon market
fluctuations.

Q: When is the accumulation of earnings allowed?

A:
1. Additional working capital
2. Expansions, improvements and repairs
3. Debt retirement
4. Acquisition of a related business or the
purchase of stock of a related business
where subsidiary relationship is
established
Note: Once the profit has been subjected to IAET, the
same shall no longer be subjected to IAET in later
years even if not declared as dividend.
Notwithstanding the imposition of the IAET, profits
which have been subjected to IAET, when finally
declared as dividends shall nevertheless be subject to
tax on dividends imposed under the NIRC except in
those instances where the recipient is not subject
thereto. (Sec. 5, RR 2-2001)

EXEMPTIONS FROM TAX ON CORPORATIONS

Q: What corporations are exempted from income

tax under the NIRC?

A:
1. Labor, agricultural or horticultural
organization not organized principally for
profit;
2. Mutual savings bank not having a capital
stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit;
3. A beneficiary society, order or association
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a nonstock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to
the members of such society, order, or
association, or nonstock corporation or
their dependents;
4. Cemetery company owned and operated
exclusively for the benefit of its members;
5. Non-stock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation
of veterans, no part of its net income or

asset shall belong to or inures to the

benefit of any member, organizer, officer
or any specific person;
6. Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures
to the benefit of any private stock-holder,
or individual;
7. Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
8. A non-stock and non-profit educational
institution;
9. Government educational institution;
10. Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of
a purely local character, the income of
which consists solely of assessments, dues,
and fees collected from members for the
sole purpose of meeting its expenses; and
11. Farmers', fruit growers', or like association
organized and operated as a sales agent for
the purpose of marketing the products of
its members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by themfs. (Sec. 30, NIRC)

Note: The income of whatever kind and character of

the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject to
tax imposed under the NIRC.

Q: What are their common requisites for

exemption?

A: PrInSE
1. Not organized and operated principally
for Profit;
2. No part of the net income Inures to the
benefit of any member or individual;
3. No capital is represented by Shares of
stock; and
4. Educational or instructive in character.

Q: Explain Sec. 30 of the NIRC which provides that

Notwithstanding the provision in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any
of their properties, real or personal, or from any of
their activities conducted for profit regardless of
the disposition made of such income, shall be
subject to tax imposed under this Code.

A:
GR: Those corporations mentioned under Sec. 30
of the NIRC are tax exempt.

XPN: The moment they invest their income or

receive income from their properties, real or
personal conducted for profit the income derived
from those properties is subject to tax.

i.e.: If religious, charitable or social welfare

corporations derive income from their properties
or any of their activities conducted for profit,
income tax shall be imposed on said items of
income irrespective of their disposition. (CIR v,
YMCA, GR 124043, Oct. 14, 1998)

XPN to the XPN: In case of non-stock, non-profit

educational institution as long as the income is
actually, directly and exclusively used for
educational purpose, such income is exempt as
provided for in Art. XIV, Sec. 3 of the 1987
Constitution.

Q: What other corporations are exempted from

income tax under special laws?

A:
1. Cooperatives under RA 6938, the
Cooperative Code of the Philippines
2. Foundations created for scientific
purposes under Sec. 24 of RA 2067, an
Act to Integrate, Coordinate, and

Intensify Scientific and Technological

Research and Development and to
Foster Invention

TAXATION OF PARTNERSHIPS

Q: Is GPP subject to income tax?

A: No, but it is required to file information returns

for its income for the purpose of furnishing
information as to the share in net income of the
partnership which each partner should include in
his individual return. Partners shall be liable for
income tax in their separate and individual
capacities.

Q: Is it necessary that the partnership be

registered?

A: Registration of a partnership is immaterial for

income tax purposes. It is taxable as long as the
following requisites concur: AI
1. There is an Agreement, oral or writing, to
contribute money, property, or industry
to a common fund; and

2. There is an Intention to divide the profits.

Q: How do we compute the net income of GPP?

A: For purposes of computing the distributive share

of each partner, the net income of the partnership
shall be computed in the same manner as a
corporation. (Sec. 26, NIRC)

Each partner shall report his distributive share in

the net income of the partnership as gross income
in his return whether actually or constructively
received.

Q: What is the treatment in case the GPP incurred

losses?

A: Results of operation of a partnership shall be

treated in the same way as a corporation. In case
of loss, it will be divided as agreed upon by the
partners and shall be taken by the individual
partners in their respective returns.

Q: How will the partners treat the loss if the

operation of the partnership resulted in a loss?

A: If the partnership operation resulted to a loss,

the partners shall be entitled to deduct their
respective shares in the net operating loss from
their individual gross income.

Q: What is the distributive share of a partner in

the net income of a business partnership?

A: It is equal to each partner s distributive share of

the net income declared by the partnership for a
taxable year after deducting the corresponding
corporate income tax.

Note: In a business partnership, there is no

constructive receipt of distributive share in the net
income.

TAXATION OF ESTATES

Q: How is income tax applied to estates?

A:
GR: Subject to income tax in the same manner
as individuals.

XPNs:
1. Personal exemption is limited to only
P20,000.
2. No additional exemption is allowed.
3. Distribution to the heirs during the
taxable year of estate income is
deductible from the taxable income of the
estate. (BIR Ruling 233-86)

Note:
1. The distributed income shall form part of
the respective heir s taxable income.
2. Deduction is allowed only when the
distribution is made during the taxable year
when the income is earned.

TAXATION OF TRUSTS

Q: Explain how trusts are taxed.

A:
GR: Subject to income tax in the same manner as
individuals. (Sec. 60 [A], NIRC)

XPNs:
1. Personal exemption is limited to only
P20,000. (Sec. 62, NIRC)
2. No additional exemption is allowed.
3. Distribution to the beneficiaries during
the taxable year of trust income is
deductible from the taxable income of the
trust. Deduction is allowed only when the
distribution is made during the taxable
year when the income is earned. (Sec. 61
[A], NIRC)

Q: Who shall file and pay the income tax?

A:
GR: If the income:
1. Is distributed to beneficiaries, the
beneficiaries shall file and pay the tax.
2. Is to be accumulated or held for future
distribution, the trustee or beneficiary
shall file and pay the tax.

XPN:
1. In a revocable trust, the income of the
trust will be returned to the grantor. (Sec.
63, NIRC)

2. In a trust where the income is held for the

benefit of the grantor, the income of the

trust becomes income of the grantor.
(Sec. 64, NIRC)

3. In a trust administered in a foreign

country, the income of the trust,
administered by any amount distributed
to the beneficiaries shall be taxed to the
trustee. (Sec. 61 [C], NIRC)

Q: Is an

employee s trust

tax-exempt?

A: Yes, provided:
1. Employee s trust must be part of a
pension, stock bonus or profit sharing
plan of the employer for the benefit of
some or all of his employees;
2. Contributions are made to the trust by
such employer, or such employees or
both;
3. Such contributions are made for the
purpose of distributing to such employees
both the earnings and principal of the
fund accumulated by the trust; and
4. The trust instrument makes it impossible
of any part of the trust corpus or income
to be used for or diverted to, purposes
other than the exclusive benefit of such
employees. (See 60[B], NIRC)

Q: Is

pension trust

taxable?

A: No, tax exemption is likewise to be enjoyed by

the income of the pension trust; otherwise,
taxation of those earnings would result in a
diminution of accumulated income and reduce
whatever the trust beneficiaries would receive out
of the trust fund. (CIR v. CA, GR 95022, Mar. 23,
1992)

Any amount received by an employee as retirement

benefits shall be excluded from gross income
subject to conditions setforth under Sec. 32 [B] of
the NIRC.

Q: What is the tax treatment in case of

consolidation of income of two or more trusts?

A: The tax computed on consolidated income, and

such proportion of said tax shall be assessed and
collected from each trustee which the taxable
income of the trust administered by him bears to
the consolidated income of the several trusts.

Q: What does in the discretion of the grantor

mean?

A: In the discretion of the grantor, either alone or in

conjunction with any person not having a
substantial adverse interest in the disposition of the
part of the income in question.

Q: What is the income of trust not subject to tax

but considered as income of grantor subject to
tax?

A: Any part of the income of a trust which in the

discretion of the grantor or of any person not
having a substantial adverse interest in the
disposition of such part of the income may be:
1. Held or accumulated for future
distribution to the grantor
2. Distributed to the grantor
3. Applied to the payment of premium upon
policies of insurance on the life of the
grantor

WITHHOLDING TAX SYSTEMS

Q: What is the

withholding tax system?

A: Under this system, taxes imposed or prescribed

by the NIRC are to be deducted and withheld by the
payor-corporations and/or persons for the former
to pay the same directly to the BIR. Hence, the
taxes are collected practically at the same time the
transaction is made or when the taxable transaction
occurs. It is taxation at source.

Note: Purpose of the withholding tax system is to:

1. Provide the taxpayer a convenient manner
to meet his probable income tax liability.
2. Ensure the collection of the income tax
which would otherwise be lost or

substantially reduced through the failure to

file the corresponding returns.
3. Improve the government s cash flow.
4. Minimize tax evasion, thus resulting in
amore efficient tax collection system.

Q: Is withholding tax a tax?

A: No, it is not a tax. It is merely a means of

collecting taxes in advance payment of tax due.

Q: What are the types of withholding taxes?

A: There are two main classifications or types of

withholding tax. These are:
1. Creditable Withholding Tax
a. Withholding Tax on Compensation
b. Expanded Withholding Tax
c. Withholding of Business Tax (VAT
and Percentage)
2. Final Withholding Tax

Q: Distinguish creditable withholding tax from

final withholding tax.

A:
CREDITABLE WITHHOLDING
TAX
FINAL WITHHOLDING
TAX
As to income subject of the system
1.
2.
3.
4.

Compensation Income
Professional/talent fees
Rentals
Cinematographic film

1. Passive incomes
2. Fringe benefits

rentals and other

payments
5. Income payments to
certain contractors
As to whether or not income should be reported as part
of the gross income
The employee is required to
include the income in his
gross income
The recipient may not
report the said income
in his gross income
because the tax
withheld constitutes
final and full settlement
of the tax liability
As to the effect of the tax withheld
The tax withheld can be
claimed as a tax credit or
may be deducted from the
tax due or payable
The tax withheld cannot
be claimed as tax credit
As to filing of ITR
There is a necessity to file on
the earner
If the only source of
income is subject to final
tax, no need to file an
ITR on the part of the
earner

Q: When does the obligation to deduct and

withhold arise?

A: At the time the income is paid or payable or

accrued or recorded as an expense or asset
whichever is applicable in the payor s books,
whichever comes first. (Sec. 2.57.4 of RR 2-98 as
amended by Sec. 4 of RR 12-2001)

It is payable when the obligation becomes due,

demandable or legally enforceable.

Q: How are withholding taxes withheld and

remitted?

A: Taxes deducted and withheld by withholding

agents shall be covered by a return and paid to,
except in cases where the CIR otherwise permits,
an authorized Treasurer of the municipality or city
where the withholding agent has his legal
residence or principal place of business, or where
the withholding agent is a corporation, where the
principal office is located. The taxes deducted and
withheld by the withholding agent shall be held as
a special fund in trust for the government until paid
to the collecting officers. (Sec. 58{A], NIRC)

Q: Who is a withholding agent?

A: A withholding agent is a separate entity acting

no more than an agent of the government for the
collection of tax in order to ensure its payments.

Note: A withholding agent is explicitly made

personally liable under Sec. 251, NIRC for the payment
of the tax required to be withheld, in order to compel
the withholding agent to withhold the tax under any
and all circumstances. In effect, the responsibility for
the collection of the tax as well as the payment
thereof is concentrated upon the person over whom
the Government has jurisdiction. (Filipinas Synthetic
Fiber Corporation v. CA, et al., GR 118498 & 124377,
Oct. 12, 1999)

Q: May a withholding agent bring a claim for

refund or tax credit of erroneously withheld tax?

A: Yes, in applications for refund, the withholding

agent is considered a taxpayer because if he does
not pay, the tax shall be collected from him. (CIR v.
Procter & Gamble Philippine Manufacturing
Corporation, GR L-66838, Dec. 2, 1991)

The withholding agent is liable for the correct

amount of the tax that should be withheld. The
withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be
finally found to be less than the amount that
should have been withheld under the law. Given
this responsibility, a withholding agent can validly
claim for tax refund.

Q: What are the duties and obligations of the

withholding agent?

A: The following are the duties and obligations of

the withholding agent to:
1. Register
To register within 10 days after
acquiring such status with the RDO
having jurisdiction over the place where
the business is located.
2. Deduct and Withhold To deduct tax
from all money payments subject to
withholding tax.
3. Remit the Tax Withheld
To remit tax
withheld at the time prescribed by law
and regulations.
4. File Annual Return To file the
corresponding Annual Information
Return at the time prescribed by law and
regulations.
5. Issue Withholding Tax Certificates
To
furnish Withholding Tax Certificates to
recipient of income payments subject to
withholding.

Q: Is the imposition of creditable withholding tax

amount to deprivation of property without due
process and thus unconstitutional?

A: No, the seller may claim tax refund if net income

is less than the taxes withheld (CREBA v. Romulo,
GR 160756, Mar. 9, 2010)

Q: Give the rule on withholding tax on

compensation.

A:
GR: Every employer making payment of wages
shall deduct and withhold upon such wages, a
tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the CIR.

XPN: In the case of a minimum wage earner.

(Sec. 79 [A], NIRC)

Q: What are the elements of withholding on

compensation?

A: There must be:

1. An employer-employee relationship;
2. Payment of compensation or wages for
services rendered; and
3. A payroll period.

Q: What are exempted from Withholding Tax on

Compensation?

A:
1. Remuneration as an incident of
employment:
a. Retirement benefits received under
RA 7641
b. Any amount received by an official
or employee or by his heirs from the
employer due to death, sickness or
other physical disability or for any
cause beyond the control of the said
official or employee such as
retrenchment, redundancy or
cessation of business
c. Social security benefits, retirement
gratuities, pensions and other
similar benefits
d. Payment of benefits due or to
become due to any person residing

in the Philippines under the law of

the US administered US Veterans
Administration
e. Payment of benefits made under the
SSS Act of 1954, as amended
f. Benefits received from the GSIS Act
of 1937, as amended, and the
retirement gratuity received by the
government employee
2. Remuneration paid for agricultural labor
3. Remuneration for domestic services
4. Remuneration for casual labor not in the
course of an employer's trade or business
5. Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international
organization
6. Payment for damages
7. Proceeds of Life Insurance
8. Amount received by the insured as a
return of premium
9. Compensation for injuries or sickness
10. Income exempt under Treaty
11. 13th month pay and other benefits not to
exceed P 30,000
12. GSIS, SSS, Medicare and other
contributions
13. Compensation Income of Minimum Wage
Earners (MWEs) with respect to their
Statutory Minimum Wage (SMW) as fixed
by Regional Tripartite Wage and
Productivity Board (RTWPB) or National
Wage and Productivity Commission
(NWPC), including overtime pay, holiday
pay, night shift differential and hazard
pay, applicable to the place where he/she
is assigned.
14. Compensation Income of employees in
the public sector if the same is equivalent
to or not more than the SMW in the nonagricultural sector, as fixed by RTWPB or
NWPC, including overtime pay, holiday
pay, night shift differential and hazard
pay, applicable to the place where he/she
is assigned.

Q: What are the violations resulting from noncompliance of obligations under the withholding
tax system?

A: Non-compliance with these obligations would

result in the following violations:

1. Non-withholding
when there is failure
to withhold tax on the taxable income of
the employee.
2. Underwithholding
when employer fails
to correctly withhold the tax which
should be equal to the tax due.
3. Non-remittance when employer fails to
remit total amount withheld.
4. Late Remittance when employer remits
the correct amount withheld beyond the
prescribed due date.
5. Failure to refund excess taxes withheld
when employer fails or refuses to refund
excess taxes withheld to its employees.

Depending on the violation, the penalties may vary

from collection of surcharge, interest and in certain
cases, compromise penalty in lieu of criminal
liability. (RMC 21-2010)

Q: What is the effect if the employer fails to

deduct and withhold the tax and thereafter the
tax against which such tax may be credited is paid
by the recipient?

A: The tax so required to be deducted and withheld

shall not be collected from the employer but it will
not relieve the employer from liability for any
penalty or addition to the tax.

Q: What if there is overpayment of tax by the

employer?

A: Refund or credit shall be made to the employer

only to the extent that the amount of such
overpayment was not deducted and withheld by
the employer.

Q: What is its effect to the employee?

A: The amount deductedand withheld during any

calendar year shall be allowed as a credit to the
recipient of such income against the tax imposed.

Q: How is the year-end adjustment done?

A: On or before the end of the calendar year but

prior to the payment of the compensation for the
last payroll period, the employer shall determine
the tax due from each employee on taxable
compensation income for the entire taxable year.

Q: What is the liability for tax of the employer?

A: The employer shall be liable for the withholding

and remittance of the correct amount of tax
required to be deducted and withheld.

Q: What if the employer failed to withhold and

remit the correct amount of tax?

A: The tax shall be collected from the employer

together with the penalties and additions to the
tax.

Q: What if an employee fails or refuses to file the

withholding exemption certificate or willfully
supplies false or inaccurate information?

A: The tax required to be withheld by the employer

shall be collected from the employee including
penalty or additions to the tax from the due date of
remittance until the date of payment.

Q: In what instances shall the excess taxes

withheld be forfeited in favor of the Government?

A: The employer s:
1. Failure or refusal to file the withholding
exemption certificate
2. False and inaccurate information

*See discussion on Withholding of VAT

RETURNS AND PAYMENT

Q: What is a tax return?

A: A tax return is a report made by the taxpayer to

the BIR on all gross income received during the
taxable year, the allowable deduction including
exemptions, the net taxable income, the income
tax rate, the income tax due, the income tax
withheld, if any, and the income tax still to be paid
or refundable.

Q: Who are required to file Income Tax Returns

(ITR)?

A:
1. Individuals
a. Resident citizens receiving income from
sources within or outside the Philippines:
i. Individuals deriving compensation
income from 2 or more employers,
concurrently or successively at
anytime during the taxable year;
ii. Employees deriving compensation
income regardless of the amount,
whether from a single or several
employers during the calendar year,
the income tax of which has not been
withheld correctly resulting to
collectible or refundable return;
iii. Employees whose monthly gross
compensation income does not
exceed 5,000 or the statutory
minimum wage, whichever is higher,
and opted for non-withholding of tax
on said income;
iv. Individuals deriving non-business,
non- professional related income in
addition to compensation income not
otherwise subject to a final tax;
v. Individuals receiving purely
compensation income from a single
employer, although the income of
which has been correctly withheld,
but whose spouse is not entitled to
substituted filling.
b. Non-resident citizens receiving income
from sources within the Philippines.
c. Citizens working abroad receiving income
from sources within the Philippines.

d. Aliens, whether resident or not, receiving

income from sources within the
Philippines. (Sec. 51 A [4], NIRC)

2. Corporations no matter how created or

organized including GPPs:
a. Domestic corporations receiving income
from sources within and outside the
Philippines.
b. Foreign Corporations receiving income
from sources within the Philippines.

3. Estates and Trusts engaged in trade or

business

Q: How should married individuals file an ITR?

A: They file only one return for the taxable year if

they are married and do not derive income purely
from compensation. If impractical to file only one
return, each spouse shall file a separate return of
income but the return so filed shall be consolidated
by the BIR. (Sec. 51 [D], NIRC)

Q: Who are the individuals exempt from filing an

ITR?

A: Individuals:
1. Whose gross income do not exceed the
total personal and additional exemptions
2. With respect to pure compensation
derived from sources within the
Philippines, the income tax on which has
been correctly withheld
3. Whose sole income have been subjected
to final withholding income tax
4. Who are exempt from income tax.

Note: Individuals not required to file an ITR may

nevertheless be required to file an information return.

Under RA 9504, minimum wage earners are granted

full tax exemption from paying income tax.

Q: What is the Confidentiality Rule with respect to

tax returns filed with the BIR?

A: Although Sec. 71 of the NIRC provides that the

tax returns shall constitute public records, it is
necessary to know that these are confidential in
nature and may not be inquired into in
unauthorized cases under the pain of penalty
provided for in Sec. 270 of the NIRC.

Note: For conviction of each act or omission, the

penalty of fine of not less than P50,000 but not more
than P100,000 or imprisonment of not less than 2
years but not more than 5 years.

Q: What are those instances wherein inquiry into

the ITR of taxpayers may be authorized?

A: When:
1. Inspection of the return is authorized
upon the written order of the President
of the Philippines;
2. Inspection is authorized under Finance
Regulation No. 33 of the Secretary of
Finance;
3. Production of the tax return is material
evidence in a criminal case wherein the
Government is interested in the result;
4. Production or inspection thereof is
authorized by the taxpayer himself.

Q: Where to file the ITR?

A: With any authorized agent bank, Revenue

District Officer, Collection agent or duly authorized

Treasurer of the municipality or city where such
person has legal residence or principal place of
business or with the CIR. (Sec. 51 [B], NIRC)

For non-resident citizens, with the Philippine

Embassy or nearest Philippine Consulate or mailed
directly to CIR.

Q: When to file the ITR?

A: On or before Apr. 15 of each year covering

income of the preceding taxable year for individual
taxpayers. (Sec. 51 [C], NIRC)

Individuals who are self-employed or in practice of

a profession are required to file and pay estimated
income tax every quarter as follows:
1. First Quarter - Apr. 15
2. Second Quarter - Aug. 15
3. Third Quarter - Nov. 15
4. Final Quarter - Apr. 15 of the following
year

For corporations, a quarterly tax return for the first

3-quarters shall be required on a strictly 60-day
basis. The final adjusted return shall be on the
15th day of the 4th month following the close of
either fiscal or calendar year (Sec. 77 [B], NIRC)

Q: What is substituted filing?

A: It is when the employer s annual return may be

considered as the substitute ITR of an employee
inasmuch as the information provided in his
income tax return would exactly be the same
information contained in the employer s annual
return.

Q: What are the conditions under the substitute

filing of ITR?

A:
1. Employee receives purely compensation
income, regardless of amount, during the
taxable year;
2. He receives the income only from one
employer;
3. Income tax withheld is equal to income
tax due; and
4. Employer filed information return
showing the income tax withheld on
employees compensation income. (RR 32002)

Q: What is the manner of paying income tax?

A:
GR: Pay-as-you-file system - the income tax
shown on the return should be paid at the time
the return is filed.

XPN: Individuals may pay in two equal

installments if the income tax due on the annual
return exceeds P2,000 in which case: (1) the first
installment shall be paid at the time the return is
filed and (2) the second installment, on or before
July 15 following the close of the calendar year.

If any installment is not paid on or before the

date fixed for its payment, the whole amount of
the tax unpaid becomes due and payable,
together with the delinquency penalties.

Q: How is the return and payment of tax in case of

government employees?

A: The return of the amount deducted and withheld

upon any wage shall be made by the officer or

employee having control of the payment of such

wage, or by any officer or employee duly
designated for the purpose.

ESTATE TAX

Basic Principles

Q: What are transfer taxes?

A: They are imposed upon the privilege of disposing

gratuitously private properties. These are levied on
the transmission of properties from a decedent to
his heirs or from a donor to a donee.

Q: What are the kinds of transfer tax under the

NIRC?

A:
1. Estate tax
2. Donor s tax

Q: Differentiate transfer tax from income tax.

A:
TRANSFER TAX
INCOME TAX
Upon What Imposed
Tax on transfer of property
Tax on income

Rates Applicable
Rates are lower
1. Estate tax - 5% to
20%
2. Donor s Tax - 2%
to 15% or 30%
Rates of individual income
taxes are higher - 5% to
32%
Exemptions
Lesser exemptions
More exemptions

Q: Distinguish donor s tax from estate tax.

A:
DONOR S TAX
ESTATE TAX
Nature of transfer
During the lifetime of the
donor

May take place between

natural and juridical
persons
After death of decedent

Transfer takes place only

between natural persons
Amount exempt
P100,000
P200,000
Rate of tax

2-15%
5-20%
Grant of exemption
Sec. 101, NIRC
Yes. Sec .87, NIRC
Grant of deductions
None
Yes. Sec 86, NIRC
Notice requirement
GR: Notice of donation is
not required

XPNs:
1. Donations to NGO
worth at least P50,
000. Provided, not
more than 30% of
which will be used for
administration
purposes.
2. Donation to any
candidate, political
party, or coalition of
parties

Notice of death required

in the following cases:

1. Transaction subject to
estate tax
2. Transaction exempt
from estate tax but
exceeds P20,000.

Notice, when filed

Within 2 months after

the decedent s death or

after qualifying as
executor or

administrator
Filing of return
A transfer subject to
donor s tax.
1. A transfer subject to
estate tax
2. Exempt from tax but
the gross estate
exceeds P200,000
3. Estate consists of
registered or
registrable property,
regardless of value of
gross estate
Contents of return
1. Each gift made during
the calendar year
which is to be included
in computing net gifts
2. The deductions
claimed and allowable
3. Any previous net gifts
made during the same
calendar year
4. The name of the
donee
5. Such further
information as may be
required by rules and
regulations made
pursuant to law
1. Value of the gross
estate
2. Deductions under Sec.
86, NIRC
3. Other pertinent
information
4. If Gross estate exceeds
P2M, certified by a
CPA as to assets,
deductions, tax due,
whether paid or not
Time of filing Return
Within 30 days after
donation was made
Within 6 months from
death of decedent

Extension for filing return

None
30 days in meritorious
cases
Payment of tax due
Pay as you file
Pay as you file
Extension of payment
None
GR: Extension of
payment is not allowed

XPN: When it would

impose undue hardship
upon the estate or any of
the heirs, extension may
be allowed but not to
exceed 5 years in case of
judicial settlement or
2years in case of extrajudicial settlement.

XPN to XPN: When

taxpayer is guilty of:
1. Negligence
2. Intentional disregard
of rules and
regulations
3. Fraud

Requirement for grant of extension of payment

Bond not exceeding

double the amount of
the tax and with such
sureties as the

commissioner deems
necessary

Q: Are donations inter vivos and donations mortis

causa subject to estate taxes?

A: Donations inter vivos are subject to donor's gift

tax [Sec. 91 (a) Tax Code)] while donations mortis
causa are subject to estate tax (Sec. 77, Tax Code).
However, donations inter vivos, actually
constituting taxable lifetime like transfers in
contemplation of death or revocable transfers (Sec.
78 [b] and [c], Tax Code) may be taxed for estate
tax purposes, the theory being that the transferor's
control thereon extends up to the time of his death.
(1994 Bar Question).

Definition

Q: Define estate tax.

A: It is an excise tax imposed upon the privilege of

transmitting property at the time of death and on
the privilege that a person is given in controlling to
a certain extent the disposition of his property to
take effect upon death.

Note: The tax should not be construed as a direct tax

on the property of the decedent although the tax is
based thereon.

Q: Define inheritance tax.

A: It is the tax on the privilege to receive property

from a deceased person. This has been abolished by
P.D. 69 passed on November 24, 1972, effective
January 1, 1973 due to administrative difficulty in
its collection.

Note: Presently, there is no inheritance tax imposed by

law. Only estate taxes are imposed.

Q: Distinguish estate from inheritance tax.

A:
ESTATE TAX
INHERITANCE TAX
Basis
Tax on the privilege to
transfer property upon
one s death.
Tax on the privilege to
receive property from the
decreased.
Who pays the tax
Paid by the estate
represented by the
administrator or executor
Paid by the recipients of
the properties of the
estate.
(1969 Bar Question)

Q: What is

estate planning ?

A: The manner by which a person takes step to

conserve the property to be transmitted to his heirs
by decreasing the amount of estate taxes to be paid
upon his death.

It is considered as lawful because, the legal right of

a taxpayer to decrease the amount of what
otherwise would be his taxes or altogether avoid
them by means which the law permits, cannot be
doubted. (Delpher Trades Corporation v. IAC, et al.
G.R. No. 73584, Jan. 28, 1988)

Q: A law was passed by Congress abolishing estate

tax. Is the law valid?

A: Yes, it is in the nature of a tax exemption. Settled

is the rule that the power to tax includes the power
to grant an exemption.

Nature of Transfer Tax

Q: What is the nature of transfer taxes?

A: They are excise taxes; not property taxes.

Note: They are not property taxes because their

imposition does not rest upon general ownershipbut
rather they are privilege tax since they are imposed on
the act of passing ownershipof property.

Q: What are the characteristics of estate tax?

A:
1. Excise tax
it is a tax imposed upon the
privilege of transferring property or
shifting of economic benefits and
enjoyment of the property from the dead
to the living;

2. Ad valorem tax
it is based on the fair
market value as of the time of death.
However, the appraised value of real
property as of the time of death shall be,
whichever is higher of the fair market
value
a. As determined by the Commissioner
(zonal value), or
b. As shown in the schedule of values
fixed by the Provincial and City
Assessors. (Sec. 88, NIRC)

3. Indirect tax amount may be shifted or

passed on to the transferee

4. National imposed by the National

government. It cannot be imposed by
LGU s pursuant to Sec. 133 of the Local
Government Code

5. General
to raise revenue for the
government to be used for general
purpose

6. Progressive
the rate increases as the tax
base increases. (Sec. 84, NIRC)

Q: What are the bases for the imposition of estate

tax?

A:
1. Benefits-protection theory
based on the
power of the State to demand and receive
taxes on the reciprocal duties of support
and protection i.e. distribution of the
estate of the decedent;

2. Privilege theory/State-partnership theory

the State, as a passive and silent partner
in the privilege of accumulating property,
has the right to collect the share which is
properly due it;

3. Ability to pay
the receipt of inheritance
is in the nature of unearned wealth which
creates the ability to pay the tax

4. Redistribution of wealth
receipt of
inheritance contributes to the widening
inequalities in wealth. By imposing estate
tax, the value received by the successor is
thereby reduced and brings said value
into the coffers of the government

Q: What are the requisites for the imposition of

Estate Tax?

A: DSD
1. Death of decedent;
2. Successor is alive at the time of
decedent s death; and
3. Successor is not Disqualified to inherit.

Purpose/Object of Transfer Tax

Q: Give the purposes in imposing the estate tax.

A: To:
1. Generate additional revenue for the
government
2. Reduce the concentration of wealth

3. Provide for an equal distribution of

wealth
4. Compensate the government for the
protection given to the decedent that

enabled him to prosper and accumulate

wealth

Note: Generally, the purpose of the estate tax is to tax

the shifting of economic benefits and enjoyment of
property from the dead to the living.

Time and Transfer of Properties

Q: When are the properties and rights transferred

to successors?

A: The properties and rights are transferred to the

successors at the time of death. (Art. 777, Civil
Code)

Q: What law governs the imposition of the estate

tax?

A: The statute in force at the time of death of the

decedent.

Q: When does estate tax accrue?

A: The estate tax accrues as of the death of the

decedent. The accrual of the tax is distinct from the
obligation to pay the same which is 6 months after
the death of the decedent.

Classification of Decedent

Q: Who are the taxpayers liable to pay estate tax?

A: Only individuals 1.
2.
3.
4.

Resident citizen
Non-resident citizen
Resident alien
Non-resident alien

Note: Domestic and foreign corporations are subject

only to donor s tax and not to estate tax because it is
not capable of death but may enter into a contract of
donation.

GROSS ESTATE vis-a-vis NET ESTATE

Q: What is the estate tax formula?

A:

Gross estate( Sec. 85)

Less: (1) Deductions (Sec 86)
____ (2) Net share of the surviving spouse
Net Estate

x Tax rate(Sec. 84)__________________

Estate tax due
Less: Tax credit (if any) (Sec. 86(E) or 110(B))
Estate Tax Due, if any E

Determination of Gross and Net Estate

Q: How is the gross estate determined?

A:
1. If the decedent is a resident or nonresident citizen, or a resident alien
All
properties, real or personal, tangible or
intangible, wherever situated.
2. If the decedent is a non-resident alien
Only properties situated in the Philippines
provided that, intangible personal
property is subject to the rule of
reciprocity provided for under Section
104 of the NIRC. (Section 85, NIRC)

Q: What is the basis for the valuation of gross

estate?

A:
PROPERTY VALUATION
As to real
property
Whichever is higher between the fair
market value:
1. as determined by the Commissioner
(zonal value) or
2. as shown in the schedule of values
fixed by the provincial and city
assessors
* if there is no zonal value, use the
FMV in the latest tax declaration.
As to
personal
property
Whether tangible or intangible,
appraised at FMV. Sentimental value
is practically disregarded.
As to shares
of stock
1.
a.
b.
2.

Unlisted
unlisted common - book value
unlisted preferred - par value
Listed

Arithmetic mean between the highest

and lowest quotation at a date nearest
the date of death, if none is available on
the date of death itself.
As to right to
usufruct, use
or habitation,
as well as
that of
annuity
Shall be taken into account the probable
life of the beneficiary in accordance with
the latest basic standard mortality table,
to be approved by the Secretary of
Finance, upon recommendation of the
Insurance Commissioner.

Note:
In determining the book value of common shares, the
following shall not be considered:
. Appraisal surplus
. The value assigned to preferred shares, if
there are any.

If there is an improvement, the value of improvement

is the construction cost per building pernit or the fair
market value per latest tax declaration.

Composition of Gross Estate

Q: What does gross estate include?

A:
If the decedent is a
resident citizen, nonresident citizen, or resident
alien
If the decedent is a nonresident alien
Value at the time of death
of all:
1. Real property
wherever situated
2. Personal property,
tangible or intangible,
wherever situated
3. To the extent of the
interest therein of the
decedent at the time
of his death.
Value at the time of death
of all:
1. Tangible personal
property situated in
the Philippines
2. Intangible personal
property with situs
in the Philippines
unless exempted on
the basis of
reciprocity

Q: What are the intangible properties of a nonresident alien decedent which are consider as
situated in the Philippines, hence treated as part
of the gross estate?

A: FranSha4- (Organized-Established-85- Foreign

situs)

1. Franchise which must be exercised in the

Philippines;
2. Shares, obligations or bonds issued by any
corporation or sociedad anonima
Organized or constituted in the
Philippines in accordance with its laws;
(domestic corporation)
3. Shares, obligations or bonds by any
foreign corporation 85% of its business is
located in the Philippines;
4. Shares, obligations or bonds issued by any
Foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines;
5. Shares or rights in any partnership,
business or industry Established in the
Philippines (Sec. 104, NIRC)

Note: This enumeration of intangible properties are

significant only for non-resident alien and for foreign
corporation because they are the only set of taxpayers
where the situs of the property is considered in
determining whether their property shall form part of
the gross estate or not. Remember that in case of
Filipino citizens (whether resident or non-resident) and
resident aliens all of their properties whether real or
personal wherever situated shall form part of the gross
estate.

Q: Is there an exception to the above exceptions?

A: Yes, on the basis of reciprocity. No donor s or

estate tax shall be collected in respect of intangible
personal property:

1. Total exemption - If the decedent at the

time of his death or the donor at the time
of the donation was a citizen and resident

of a foreign country which at the time of

his death or donation did not impose a
transfer tax of any character, in respect of
intangible personal property of citizens of
the Philippines not residing in that foreign
country, or

2. Partial exemption - If the laws of the

foreign country of which the decedent or
donor was a citizen and resident at the
time of his death or donation allows a
similar exemption from transfer or death
taxes of every character or description in
respect of intangible personal property
owned by citizens of the Philippines not
residing in that foreign country. (Sec. 104,
NIRC)

Q: Will shares of stock issued by a foreign

corporation in favor of a non-resident form part of
the gross estate?

A: Yes, if 85% of the business of the foreign

corporation who issued the stocks is located in the
Philippines. It is considered to have obtained
business situs in the Philippines, thus the issued
shares of stock shall form part of the gross estate of
the nonresident. (Section 104, NIRC)

Q: Is there a need to disclose properties outside

the Philippines?

A: Yes, whether resident or non-resident. A resident

decedent is taxed on properties within or without.
A non-resident is required to disclose properties
outside the Philippines under Sec. 86 (D), NIRC.

Q: Discuss the rule on situs of taxation with

respect to the imposition of the estate tax on
property left behind by a non-resident decedent.

A: The value of the gross estate of a non-resident

decedent who is a Filipino citizen at the time of his
death shall be determined by including the value at
the time of his death of all property, real or
personal, tangible or intangible, wherever situated

to the extent of the interest therein of the

decedent at the time of his death (Sec. 85 [A],
NIRC). These properties shall have a situs of
taxation in the Philippines hence subject to
Philippines estate taxes.

On the other hand, in the case of a non-resident

decedent who at the time of his death was not a
citizen of the Philippines, only that part of the entire
gross estate which is situated in the Philippines to
the extent of the interest therein of the decedent at
the time of his death shall be included in his taxable
estate. Provided, that, with respect to intangible
personal property, we apply the rule of reciprocity.
(Ibid ) (2000 Bar Question)

Q: Ralph Donald, an American citizen, was a top

executive of a U.S company in the Philippines until
he retired in 1999. He came to like the Philippines
so much that following his retirement, he decided
to spend the rest of his life in the country. He
applied for and was granted permanent resident
status the following year. In the spring of 2004,
while vacationing in Orlando Florida USA, he
suffered a heart attack and died. At the time of his
death he left the following properties:
a. Bank deposits with Citibank Makati and
Citibank Orlando Florida;
b. Rest house in Orlando, Florida;
c. A condominium unit in Makati;
d. Shares of stock in the Phil subsidiary of
the U.S company where he worked;
e. Shares of stock in San Miguel
Corporation and PLDT
f. Shares of stock in Disney World in
Florida
g. U.S treasury bonds
h. Proceeds from a life insurance policy
issued by a US corporation.

Which of the foregoing assets shall be included in

the taxable gross estate in the Philippines?
Explain.

A: All of the properties enumerated except (h), the

proceeds from life insurance, are included in the
taxable gross estate in the Philippines. Ralph

Donald is considered a resident alien for tax

purposes since he is an Aerican citizen and was a
permanent resident of the Philippines at the time of
his death. The value of the gross estate of a
resident alien decedent shall be determined by
including the value at the time of his death of all
property, real or personal, tangible or intangible,
wherever situated. (Sec. 85, NIRC) The other item,
(h) proceeds from a life insurance policy, may also
be included on the assumption that it was Ralph
Donald who took out the insurance upon his own
life, payable upon his death to his estate. (Sec.
85[E], NIRC). (2005 Bar Question)

Q: What is the meaning of fair market value?

A: The price at which any seller will sell and any

buyer will buy both willingly without any force or
intimidation.

Items to be Included in Gross Estate

Q: What are included in the gross estate?

A:
1. Decedent's interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under general power of
appointment
5. Proceeds of life insurance
6. Prior interests
7. Transfers of insufficient consideration

Note: Nos. 2, 3, 4 and 7- properties not physically in

the estate (these have already been transferred during
the lifetime of the decedent but are still subject to
payment of estate tax) - are transfers inter-vivos which
are considered part of gross estate.

Decedent s Interest.

Q: What does the decedent s interest include?

A: It includes any interest having value or capable of

being valued, transferred by the decedent at his
death.

Q: Jose Ortiz owns 100 hectares of agricultural

land planted with coconut trees. He died on May
30, 1994. Prior to his death, the government, by
operation of law, acquired under the
Comprehensive Agrarian Reform Law all his
agricultural lands except five (5) hectares. Upon
the death of Ortiz, his widow asked you how she
will consider the 100 hectares of agricultural land
in the preparation of the estate tax return. What
advice will you give her?

A: The 100 hectares of land that Jose Ortiz owned

but which prior to his death on May 30, 1994 were
acquired by the government under CARP are no
longer part of his taxable gross estate, with the
exception of the remaining five (5) hectares which
under Sec. 78{a) of the Tax Code still forms part of
"decedent's interest". (1994 Bar Question)

Transfer In Contemplation of Death.

Q: Define

transfer in contemplation of death .

A: This is a transfer motivated by the thought of

impending death although death may not be
imminent:

1. When the decedent has, at any time,

made a transfer in contemplation of or
intended to take effect in possession or
enjoyment at or after death;or

2. When decedent has, at any time, made a

transfer under which he has retained for
his life or for a period not ascertainable
without reference to his death or any
period which does not in fact end before
his death:
a. Possession, enjoyment or right to
income from the property; or
b. The right alone or in conjunction
with any other person to designate
the person who will possess or enjoy
the property or income there from.
(Sec. 85[B], NIRC)

Note: The concept of transfer in contemplation of

death has a technical meaning. This does not
constitute any transfers made by a dying person. It is
not the mere transfer that constitutes a transfer in
contemplation of death but the retention of some type
of control over the property transferred. In effect,
there is no full transfer of all interests in the property
inter vivos.

Q: What are the transfers not considered in

contemplation of death and not part of the gross
estate?

A:
1. A bonafide sale

2. Sale for adequate and full consideration

in money or in money s worth.(Ibid.)

Q: A, aged 90 years and suffering from incurable

cancer, on August 1, 2001 wrote a will and, on the
same day, made several inter-vivos gifts to his
children. Ten days later, he died. In your opinion,
are the inter-vivos gifts considered transfers in
contemplation of death for purposes of
determining properties to be included in his gross
estate?

A: Yes. When the donor makes his will within a

short time of, or simultaneously with, the making of
gifts, the gifts are considered as having been made
in contemplation of death. (Roces v. Posadas, 58
Phil. 108). Obviously, the intention of the donor in
making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees
are likewise his forced heirs who are called upon to
inherit, it will create a presumption juris tantum
that said donations were made mortis causa,
hence, the properties donated shall be included as
part of A's gross estate. (2001 Bar Question)

Q: What is the 3-year Presumption Rule? Give an

example.

A: The 3-year presumption rule states that any

transfer made within 3 years before one s death is
considered one in contemplation of death.

Q: Is the said rule (3-year Presumption Rule) still

applicable?

A: No. It was deleted by P.D. 1705.

Q: What are the circumstances to be taken into

account in determining whether the transfer is one
in contemplation of death?

A:

1. Age of the decedent at the time the

transfers were made
2. Decedent s health, as he knew it at or
before the time of the transfers
3. The interval between the transfers and
the decedent s death
4. The amount of property transferred in
proportion to the amount of property
retained
5. The nature and disposition of the
decedent
6. The existence of a general testamentary
scheme of which the transfers were a part
7. The relationship of the donee(s) to the
decedent
8. The existence of a desire on the part of
the decedent to escape the burden of
managing property by transferring the
property to others
9. The existence of a long established giftmaking policy on the part of the decedent
10. The existence of a desire on the part of
the decedent to vicariously enjoy the
enjoyment of the donees for the property
transferred
11. The existence of the desire by the
decedent of avoiding estate taxes by
means of making inter vivos transfers of
property. (Estate of Oliver Johnson v.
Commissioner, 10 T.C. 680).

Revocable Transfer.

Q: Define revocable transfer.

A: A revocable transfer is a transfer by trust or

otherwise, where the enjoyment thereof was
subject at the date of his death to any change
through the exercise of a power to alter or amend
or revoke or terminate such transfer by:

1. Decedent alone;
2. By the decedent in conjunction with any
other person without regard to when or
from what source the decedent acquired
such power, to alter, amend, revoke or
terminate; or
3. Where any such power is relinquished in
contemplation of the decedent s death
other than a bone fide sale for an
adequate and full consideration in money
or money s worth. (Sec. 85(C)(1), NIRC)

Q: When is the power to alter, amend or revoke

considered existing on date of decedent s death?

A: The power to alter, amend or revoke shall be

considered to exist on date of decedent s death
even though:
1. The exercise of the power is subject to a
precedent giving of notice; or
2. The alteration, amendment or revocation
takes effect only on the expiration of a
stated period for the exercise of the
power, whether or not on or before the
date of the decedent s death
a. Notice has been given
b. The power has been exercised

In such cases, proper adjustment shall be made

representing the interest which would have been

excluded from the power if the decedent had lived,

and for such purpose if notice has not been given or
the power has not been exercised on or before the
date of his death, such notice shall be considered to
have been given, or the power exercised on the
date of his death. (Sec. 85(C)(2), NIRC)

Note: Revocable transfer is part of the gross estate of

the decedent because the transferor can revoke the
transfer any time, such person wields tremendous
amount of power such that he can revoke the transfer
as if none was actually made.

Q: Is it necessary that the decedent should have

exercised such right?

A:
GR: No. It is sufficient that the decedent has the
power to revoke, though he did not exercise
such power.

XPN: In case of a bona fide sale for an adequate

& full consideration in money and money s
worth.

Q: When is a transfer not revocable, thereby not

subject to estate tax?

A:
1. If the decedent s power could only be
exercised with the consent of all parties
having an interest in the transferred
property and if the power adds nothing to
the rights the parties possess under local
law. (Lober v. United States, 346 US 335)
2. When the decedent has been completely
divested of the power at the time of his
death (ibid.)
3. Where the exercise of the power by the
decedent was subject to a contingency

beyond the decedent s control which did

not occur before his death. (Hurd v.
Commissioner 160F(2)610)
4. The mere right to name trustees. Neither
is the grantor s limited power to appoint
himself as trustee under conditions which
did not exist at his death. (24 Am Jur. 2d,
p 790)

Property Passing Under a General Power of

Appointment

Q: Define general power of appointment (GPA).

A: It is the right to designate the person who will

succeed to the property of the prior decedent, in
favor of anybody, including himself, his estate, his
creditors, or the creditors of his estate. If the
donation contains a provision of reversion to the
donor, this is similar to a revocable transfer.

Note: A power is not general (specific) if it can be

exercised only in favor of one or more designated
person or classes of persons exclusive of the decedent,
his estate, his creditors and creditors of his estate, or if
it expressly not exercisable in favor of the decedent,
his estate, his creditors, or creditors of his estate.

Q: What properties passing under a GPA is

includible as part of a decedent s estate?

A: Those properties passed by the decedent under

a GPA by:
1. Will

2. Deed executed in contemplation of death,

or intended to take effect in possession or
enjoyment at, or after his death
3. Deed under which he has retained for
hislife or for any period not ascertainable
without reference to his death or for any
period which does not in fact end before
his death:
a. the possession, enjoyment or right to
income from the property;
b. or the right to designate the person
who will possess or enjoy the
property or income therefrom. (Sec.
85[D], NIRC)

Q: What properties passing under GPA are not

included as part of a decedent s gross estate?

A: Those properties transferred:

1. Under a bona fide sale
2. For an adequate and full consideration in
money or money s worth (Ibid.)

Q: Differentiate transfer in contemplation of

death from general power of appointment .

A:
TRANSFER IN
CONTEMPLATION OF
DEATH
GENERAL POWER OF
APPOINTMENT (GPA)
Effectivity
At or after death
For his life or any period
not ascertainable without
reference to his death or
for any period which does
not in fact end before his
death
Means

By trust or otherwise
Property passed under GPA
and by will or by deed

Proceeds Of Life Insurance.

Q: When are the proceeds of insurance policy

considered as part or not of the gross estate?

A:
1. Part of the gross estate when the
beneficiary is:
a. The estate of the decedent, his
executor or administrator regardless
of whether the designation is
revocable or irrevocable; and
b. A third person, other than the
decedent s estate, executor, or
administrator provided that the
designation is revocable.

2. Not part of the gross estate when:

a. Proceeds receivable by a beneficiary
designated as irrevocable provided
that the beneficiary is not the
decedent s estate, executor and
administrator; and
b. Where the insurance was not taken
by the decedent upon his own life
and the beneficiary is not the
decedent s estate, executor, or
administrator. (Section 85(E), NIRC)

Q: Who is a third person?

A: It is one other than the estate, executor, and

administrator.

Q: What if the beneficiary who was irrevocably

designated caused the death of the insured?

A: Considered revocable unless he acted in selfdefense.

Q: Suppose an employer takes a life insurance

policy on the life of an employee where the
employer is designated as the beneficiary, what
are its tax implications?

A: The premiums paid by the employer will not be

deductible from its employer s gross income (Sec.
36 [A][4], NIRC). Neither will it be included in the
gross income of the employee-beneficiary based on
Sec. 32(B)(1), NIRC. However, the life insurance
proceeds will form part of the gross estate of the
decedent employee if his designation is revocable.
Conversely, if the designation is irrevocable, it will
not form part of his gross estate.

Q: If the property insured was destroyed after the

taxpayer s death, will it still form part of the gross
estate?

A: No, it will be considered as a receivable of the

estate.

Q: Antonia Santos, 30 years old, gainfully

employed, is the sister of Eduardo Santos. She
died in an airplane crash. Edgardo is a lawyer and
he negotiated with the airline company and
insurance company and they were able to agree to
settlement of P10 million. This is what Antonia
would have earned as somebody who was
gainfully employed. Edgardo was her only heir.

1. Is the P10 million subject to estate tax?

2. Should Edgardo report the 10 million as his
income being Antonia s only heir?

A:
1. No. The estate tax is a tax on the privilege
enjoyed by an individual in controlling the
disposition of her properties to take
effect upon her death. The P10 million is
not a property existing at the time of the
decedent s death; hence it cannot be said
that she exercised control over its
disposition. Since the privilege to transmit
property is not exercised by the decedent,
the estate tax cannot be imposed
thereon.

2. No. The amount received in a settlement

agreement with the airline company and
insurance company is an amount received
from the accident insurance covering the
passenger of the airline company and is in
the nature of compensation for personal
injuries and for damages sustained on
account of such injuries, which is
excluded from the gross income of the
recipient. (2007 Bar Question)

Q: On June 30, 2000, X took out a life insurance

policy on his own life in the amount of P2,000,000.
He designated his wife, Y, as irrevocable
beneficiary to P1,000,000 and his son Z, to the
balance of P1,000,000, but in the latter
designation, reserving his right to substitute him
for another. On September 1, 2003 X died and his
wife and son went to the insurer to collect the
proceeds of X s life insurance policy.

1. Are the proceeds of the insurance subject to

income tax on the part of Y and Z for their
respective shares? Explain.
2. Are the proceeds of the insurance to form
part of the gross estate of X? Explain.

A:
1. No. The law explicitly provides that the
proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death

of the insured are excluded from gross

income and is exempt from taxation. The
proceeds of life insurance received upon
the death of the insured constitute a
compensation for the loss of life, hence a
return of capital, which is beyond the
scope of income taxation (Sec. 32 B (1),
NIRC)

2. Only the proceeds of 1,000,000.00 given

to the son, Z, shall form part of the Gross
Estate of X. Under the Tax Code, proceeds
of life insurance shall form part of the
gross estate of the decedent to the extent
of the amount receivable by the
beneficiary designated in the policy of the
insurance except when it is expressly
stipulated that the designation of the
beneficiary is irrevocable. As stated in the
problem, only the designation of Y is
irrevocable while the insured/decedent
reserved the right to substitute Z as
beneficiary for another person.
Accordingly, the proceeds received by Y
shall be excluded while the proceeds
received by Z shall be included in the
gross estate of X. (Sec. 85(E), NIRC) (2003
Bar Question)

Prior Interest

Q: What is the meaning of

prior interest ?

A: All transfers, trusts, estates, interests, rights,

powers and relinquishment of powers made,
created, arising existing, exercised or relinquished
before or after the effectivity of the Tax Code. (Sec.
85, NIRC)

Transfers for Insufficient Consideration

Q: What shall be included in the gross estate if a

transfer is for insufficient consideration?

A: Only the excess of the fair market value of the

property at the time of the decedent s death over
the consideration received shall be included in the
gross estate.

Q: When is this applicable?

A: This is applicable to:

1. Transfers in contemplation of death
2. Revocable transfers
3. Transfers under general power of
appointment which are not bona fide sale
for an adequate and full consideration in
money and money s worth.

Q: Can this transfer be subjected to donor s tax?

A: It is subject to donor s tax if there is no reference

to:
1. Revocable transfer
2. Contemplation of death
3. General power of appointment.

Note: It is subject to estate tax if the 3 instances

mentioned are present. (Sec. 100 in relation to Sec
85[B], NIRC).

Q: What are the acquisitions and transfers which

are not included in the gross estate?

A: FAMI-30%
1. The Merger of the usufruct in the owner
of the naked title
2. The transmission or the delivery of the
inheritance or legacy by the fiduciary heir
or legate to the Fideicommissary
3. The transmission from the first heir,
legatee or donee in favor of Another
beneficiary, in accordance with the desire
of the predecessor
4. All the bequests, devises, legacies or
transfers to social welfare, cultural and
charitable Institutions no part of the net
income of which inures to the benefit of
any individual: provided that not more
than 30% of the value given is used for
administrative purposes [Sec. 87, NIRC]

DEDUCTIONS FROM ESTATE

Q: What may be deducted from the gross estate?

A:
If the decedent is a resident
citizen,
non-resident citizen, or
resident alien
(EPTran-FS-MAN)
If the decedent is a nonresident alien
(EPTraN)
1. EExpenses, losses,
indebtedness, and taxes
(ELIT):
a. fFuneral expenses
b. jJudicial expenses

for testamentary or
intestate
proceedings
c. cClaims against the
estate
d. cClaims against
insolvent persons
included in the
gross estate
e. uUnpaid mortgages
or indebtedness
upon the property
f. uUnpaid taxes
g. lLosses incurred
during the
settlement of the
estate
2. Property previously taxed
3. Transfers for public use
4. The Family home
5. Standard deduction
6. Medical expenses
7. Amount received by heirs
under R.A. No. 4917
1. EExpenses, losses,
indebtedness, and
taxes (ELIT):
a. fFuneral expenses
b. jJudicial expenses
for testamentary
or intestate
proceeding
c. cClaims against
the estate
d. cClaims against
insolvent persons
included in the
gross estate
e. uUnpaid
mortgages or
indebtedness
upon the
property
f. uUnpaid taxes
g. lLosses incurred
during the
settlement of the
estate
2. Property Previously
Taxed
3. Transfers for Public Use
4. Net share of the
surviving spouse in the

(Retirement Benefits of
Employees of Private
Firms)
8. Net share of the surviving
spouse in the conjugal or
community property.
conjugal or community
property

Note:
The following expenses are not allowed as deductions
to non-resident aliens:
1.
2.
3.
4.

Family home
Standard deduction
Hospitalization expenses
Retirement pay

EXPENSES, LOSSES, INDEBTEDNESS, AND TAXES

(ELIT)

Q: What is the difference in the treatment of ELIT

as deduction allowed to nonresident estates?

A: In the case of a nonresident not a citizen of the

Philippines, ELIT is allowed as a deduction in
proportion of the deductions specified in Sec.
86(A)(1) of the NIRC which the value of such part
bears to the value of his entire gross estate
wherever situated.

Note: Section 86(A)(1) refers to the Expenses, Losses,

Indebtedness and Taxes (ELIT)

Q: What is the formula for computing ELIT

deductible from the gross estate of a nonresident
alien decedent?

A:
Philippine
Gross
Estate
World
Gross
Estate
x
Expenses,
Losses,
Indebtedness
and Taxes
(ELIT)
=
Allowable
Deductions
from Gross
Income

Actual Funeral Expenses

(whether paid or unpaid).

Q: What is the amount of funeral expenses

deductible from the gross estate of a Filipino
decedent (whether resident or non-resident) or of
a resident alien decedent?

A: The amount deductible is the lower between:

1. actual funeral expenses or
2. 5% of the gross estate

But not exceeding P200,000.

Q: What is the amount of funeral expenses

deductible from the gross estate of a non- resident
alien decedent?

A: The proportion which actual funeral expenses or

amount equal to 5% of the gross income whichever
is lower but not to exceed P20,0000 bears to the
value of the entire gross estate whichever situated.

Q: What are included as funeral expense?

A: The term is not confined to its ordinary or usual

meaning. It includes:
1. Mourning apparel of the surviving spouse
and unmarried minor children of the
deceased, bought and used in the
occasion of the burial;
2. Expenses of the wake preceding the burial
including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses in
informing relatives of the deceased;
5. Cost of burial plot, tombstone monument
or mausoleum but not their upkeep. In
case deceased owns a family estate or
several burial lots, only the value
corresponding to the plot where he is
buried is deductible;
6. Interment and/or cremation fees and
charges;
7. All other expenses incurred for the
performance of the ritual and ceremonies
incident to the interment.

Note: Expenses incurred after the interment are not

deductible. Any portion of the funeral and burial
expenses borne or defrayed by relatives and friends of
the deceased are not deductible. The expenses must
be duly supported by receipts or invoices or other
evidence to show that they were actually incurred (RR2-2003).

Note: Medical expenses, on the other hand, are

allowed only if incurred by the decedent within one
year prior to his death. (Sec. 86[A][6], NIRC).

Judicial Expenses Off

Testamentary Or Intestate Proceedings.

Q: What are included?

A: Expenses allowed as deduction under this

category are those incurred in the:
1. Inventory-taking of assets comprising the
gross estate;
2. Administration;
3. Payment of debts of the estate;
4. Distribution of the estate among the
heirs.

Note: These deductible items are expenses incurred

during the settlement of the estate but not beyond the
last day prescribed by law, or the extension thereof,
for the filing of the estate tax return.

Q: May the notarial fee paid for the extrajudicial

settlement and the attorney's fees in the
guardianship proceedings be allowed as
deductions from the gross estate of decedent in
order to arrive at the value of the net estate?

A: Although the Tax Code specifies "judicial

expenses of the testamentary or intestate
proceedings," there is no reason why expenses
incurred in the administration and settlement of an
estate in extrajudicial proceedings should not be
allowed. However, deduction is limited to such
administration expenses as are actually and
necessarily incurred in the collection of the assets
of the estate, payment of the debts, and
distribution of the remainder among those entitled
thereto. Such expenses may include executor's or
administrator's fees, attorney's fees, court fees and
charges, appraiser's fees, clerk hire, costs of
preserving and distributing the estate and storing or
maintaining it, brokerage fees or commissions for
selling or disposing of the estate, and the like.
Deductible attorney's fees are those incurred by the
executor or administrator in the settlement of the
estate or in defending or prosecuting claims against

or due the estate.

Attorney's fees, on the other hand, in

order to be deductible from the gross estate must
be essential to the settlement of the estate.
Attorney's fees incurred in the guardianship
proceeding were essential to the distribution of the
property to the persons entitled thereto. Hence,
the attorney's fees incurred in the guardianship
proceedings should be allowed as a deduction from
the gross estate of the decedent. (CIR v. CA, G.R No.
123206, Mar. 22, 2000)

Q: What items are not included as judicial

expenses of the testamentary and judicial
proceedings?

A:
1. Expenditures incurred for the individual
benefit of the heirs, devisees, legatees
2. Compensation paid to a trustee of the
decedent s estate when it appeared that
such trustee was appointed for the
purpose of managing the decedent s real
property for the benefit of the
testamentary heir

3. Premiums paid on the bond filed by the

administrator as an expense of
administration since the giving of a bond
is in the nature of a qualification for the
office and not necessary for the
settlement of the estate
4. Attorney s fees incident to litigation
incurred by the heirs in asserting their
respective rights (ibid).

Claims Against The Estate

Q: Define

claims .

A: Debts or demands of a pecuniary nature which

could have been enforced against the deceased in
his lifetime and could have been reduced to simple
money judgments.

Q: What are the sources of these claims?

A: They may arise out of: CTO

1. Contract
2. Tort
3. By Operation of law

Q: When may it be allowed as a deduction from

the gross estate of a Filipino citizen, whether
resident or not, or of a resident alien decedent?

A: Claims against the estate may be claimed as a

deduction provided that:
1. At the time the indebtedness was
incurred the debt instrument was duly
notarized; and
2. If the loan was contracted within three (3)
years before the death of the decedent,
the administrator or executor shall submit
a statement showing the disposition of

the proceeds of the loan. (Sec 86[A][1][c],

NIRC)

Q: What are the requisites for its deductibility?

A: TiG-VaC
1. The liability represents a personal
obligation of the deceased existing at the
Time of his death except unpaid
obligations incurred incident to his death
such as unpaid funeral expenses and
unpaid medical expenses;
2. The liability was contracted in Good faith
and for adequate and full consideration in
money or money s worth;
3. Must be a debt or claim must be Valid
and enforceable in court;
4. The indebtedness must not have been
Condoned by the creditor or the action to
collect from the decedent must not have
prescribed (RR 2-2003; and
5. It must be duly substantiated.

Note: Substantiation Requirements (if a claim arose

out of a debt instrument) :

a. The debt instrument was duly notarized at

the time the indebtedness was incurred,
except loans from financial institutions
where notarization is not part of business
practice or policy; and
b. A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the proceeds of
the loan if said loan was contracted within
(3) years prior to the death of the decedent.

Q: During the proceeding for the probate of Jose

Fernandez s estate, Dizon, the administrator,
requested the probate court's authority to sell
several properties forming part of the estate, for
the purpose of paying its creditors. However, the

BIR issued an Estate Tax Assessment Notice

demanding payment of the deficiency estate tax.
Dizon claims that in as much as the valid claims of
creditors against the estate are in excess of the
gross estate, no estate tax was due. CTA ordered
that the estate should pay the estate tax liability
with interest.

May the actual claims of the creditors be fully

allowed as deductions from the gross estate of
Jose despite the fact that the claims were reduced
or condoned through compromise agreements
entered into by the Estate with its creditors

A: No. The claims against the estate which the law

allows as deduction from the gross estate are
existing claims against the estate. An indebtedness
that has been condoned is in legal effect no
indebtedness at all. If there is no more
indebtedness by reason of the condonation, there
is no more claim against the estate which may be
allowed as a deduction. (Dizon, et. al v. CA, G.R. No.
140944, Apr. 30, 2008)

Claims of Deceased Against Insolvent

Q: What are the requisites for deductibility?

A: This is deductible provided that:

1. The full amount of the receivables be
included first in the gross estate; and
2. The incapacity of the debtors to pay their
obligation is proven not merely alleged.

Note: Judicial declaration of insolvency is not

necessary. It is enough that the debtor s liabilities
exceeded his assets.

Unpaid Mortgage

Q: What are the requisites for deductibility?

A: This is deductible provided that:

1. In all instances:
a. The value of the property,
undiminished by such mortgage or
indebtedness is included in the gross
estate; and
b. The mortgage indebtedness was
contracted in good faith and for an
adequate and full consideration in
money or money s worth;
2. In case unpaid mortgage payable is being
claimed by the estate, verification must
be made as to who was the beneficiary of
the loan proceeds;
3. If the loan is found to be merely an
accommodation loan where the loan
proceeds went to another person, the
value of the unpaid loan must be included
as a receivable of the estate; and
4. If there is a legal impediment to recognize
the same as receivable of the estate, said
unpaid obligation/ mortgage payable shall
not be allowed as a deduction from the
gross estate. (Section 86(A)(1))(e), NIRC)

Taxes

Q: What are deductible taxes?

A:

1. Income taxes upon income received

before the decedent s death
2. Property taxes which accrue before the
decedent s death

Q: What taxes are not deductible?

A: Those accruing after death, such as:

1. Income tax on income received after
death
2. Property tax not accrued before death
3. Estate tax.

Losses

Q: What are the requisites for its deductibility?

A: Losses are allowed as deductions from the gross

estate of a Filipino citizen whether resident or non
resident and resident alien are allowed provided
that they:
1. Were incurred during the settlement of
the estate;
2. Arise from fire, storm, shipwreck, or other
casualties, or robbery, theft or
embezzlement;
3. Are not compensated by insurance or
otherwise;
4. Are not claimed as deduction in the ITR of
the estate at the time of the filing of the
return; and
5. Occur not later than the last day for
payment of the estate tax (last day to pay:
six months after the decedent s death).
(Sec. 86[A][1][e], NIRC)

Q: If the decedent is a non-resident alien

decedent, would the rule be the same?

A: The same items herein shall be allowed as

deduction but only the proportion of such
deductions which the value of his gross estate in
the Philippines bears to the value of his entire gross
estate, wherever situated shall be deducted.

Note: Casualty loss can be allowed as deduction in one

instance only, either for income tax purposes or estate
tax purposes.

Property Previously Taxed

(Vanishing Deductions).

Q: What is Vanishing Deduction?

A: It is the deduction allowed from the gross estate

of citizens, resident aliens and non resident estates
for properties which were previously subject to
donors or estate taxes.

Note: The purpose of vanishing deduction is to lessen

the harsh effects of double taxation.

Q: What is the rate of deduction?

A: The rate of deduction depends on the period

from the date of transfer to the death of the
decedent, as follows:

PERIOD
DEDUCTION
Within 1 year or less
100%

More than 1 year but

not more than 2 years
80%
More than 2 years but not more
than 3 years
60%
More than 3 years but not more
than 4 years
40%
More than 4 years but not more
than 5 years
20%

Note: In property previously taxed, there are two (2)

transfers of property. Within a period of 5 years, the
same property has been transferred from the first to
the second decedent or from a donor to the decedent.
In such case, the first transfer has been subject to a
transfer tax. The second transfer would now be subject
to a vanishing deduction as provided in the code.

Q: What are the requisites for its deductibility?

A: 5-P2INT
1. The present decedent died within 5 years
from receipt of the property from the
prior decedent or donor;
2. The property on which vanishing
deduction is being claimed is located
within the Philippines;
3. The property formed Part of the taxable
estate of the prior decedent or of the
taxable gift of the donor;
4. The estate Tax on the prior succession or
donor s tax on the gift must have been
finally determined and paid;
5. The property on which the vanishing
deduction is taken must be Identified as
the one received or acquired; and
6. No vanishing deduction was allowed on
the same property on the prior
decedent s estate.

Q: What if the decedent is a non-resident alien?

A: In case of a non-resident alien decedent, the

property involved must be located within the
Philippines and is included in the gross estate.

Q: What is the formula for computing the

vanishing deductions?

A:

Value of property previously taxed

LESS: Mortgage debt paid, if any (first deductions)
-------------------------------------------------------------First basis

Value of gross estate of the present decedent

LESS: Expenses
--------------------------------------------------------------Second deduction

First basis
LESS: Second deduction
------------------------------------Second basis
Multiplied by 100%, 80%, etc. (as the case may be)
------------------------------------------------Vanishing deduction

Q: What are the conditions for deductibility?

A:
1. The gift tax or estate tax imposed were
finally determined and paid by or on
behalf of such donor or estate of such
prior decedent;
2. The deduction allowed is only in the
amount finally determined as the value of
such property in determining the value of
the gift, or the gross estate of such prior
decedent;
3. Only to the extent that the value of such
property is included in the decedent s
gross estate;
4. Only if in determining the value of the
estate of the prior decedent, no
deduction was allowed for property
previously taxed in respect of the
property of properties given in exchange
therefore;

5. Where a deduction was allowed of any

mortgage or lien in determining the gift
tax, or the estate tax of the prior
decedent, which were paid in whole or in
part prior to the decedent s death, then
the deduction allowable for property
previously taxed shall be reduced by the
amount so paid;
6. Such deduction allowable shall be
reduced by an amount which bears the
same ratio to the amounts allowable as
deductions for expenses, losses,
indebtedness, taxes and transfers for
public use as the amount otherwise
deductible for property previously taxed
bears to the value of the decedent s
estate; and
7. Where the property referred to consists
of two or more items, the aggregate value
of such items shall be used for the
purpose of computing the deduction.

Transfer for Public Use

Q:What are the requisites for deductibility?

A: WIG-PD
1. The disposition is in a last Will and
testament;
2. To take effect after Death;
3. In favor of the Government of the
Philippines or any political subdivision
thereof;
4. For exclusive Public purposes; and
5. The value of the property given is
Included in the gross estate.

Note: The transfer also contemplates bequests,

devices or transfers to social welfare, cultural and
charitable institutions.

Q: What if the decedent is a non-resident alien?

A: In case of a non-resident alien decedent, the

property transferred must be located within the
Philippines and included in the gross estate.

Q: Differentiate Sec. 86(A)(3) from Sec. 87(D) of

the NIRC.

A:

Sec. 86(A)(3)
Sec. 87(D)
It contemplates
transfers by a citizen
or resident of the
Philippines in favor of
the Government of
the Philippines or any
political subdivision
thereof, for public
purpose which are
deducted from the
gross estate
It contemplates
transfers to social
welfare, cultural and
charitable institutions
which are exempted
from estate tax.

Family Home

Q: Define family home.

A: The dwelling house, including the land where it is

situated where the married person or an unmarried
head of the family and his family resides.

Q: When is family home deemed constituted?

A: Family home is deemed constituted on the house

and lot from the time that it is constituted as a
family residence and is considered as such so long
as any of the beneficiaries actually resides therein.

Q:What are the requisites for its deductibility?

A:
1. The family home must be the actual
residential home of the decedent and his
family at the time of his death, as certified
by the Barangay Captain of the locality
where the family home is situated;
2. The total value of the family home must
be included as part of the gross estate of
the decedent; and
3. Allowable deduction must be in the
amount equivalent to:
a. the current FMV of the family home
as declared or included in the gross
estate, or
b. the extent of the decedent s interest
(whether conjugal/community or
exclusive property), whichever is
lower, but not exceeding P1,
000,000.

Note: The estates of non-resident decedents are not

allowed to avail the family home deduction because
they do not have a family home in the Philippines since
they are non residents. For purposes of availing the
family home deduction to the extent allowable a
person may constitute only one family home.

Note: Actual occupancy of the house or house and lot

as the family residence shall not be considered
interrupted or abandoned in such cases as the
temporary absence from the constituted family home
due to travel or studies or work abroad, etc. The family
home is generally characterized by permanency, that
is, the place to which, whenever absent for business or
pleasure, one still intends to return.

Standard Deduction

Q: What is the amount of the standard deduction?

A: P1 Million, without need of any substantiation.

(Sec. 86 (A)(5))

Note: Nonresident estates are not entitled to standard

deduction because it is not among those enumerated
under Sec. 86 (b) of the NIRC.

Q: What is the difference between standard

deduction in estate tax (Sec. 86[A][5]) and optional
standard deduction in income taxation(Sec. 34
[L])?

A:
STANDARD DEDUCTION in
ESTATE TAX
(Sec. 86 [A][5])
OPTIONAL STANDARD
DEDUCTION in INCOME
TAX
(Sec. 34 [L])
As to nature
Deduction in addition to
the other deductions
Deduction in lieu of
itemized deductions

As to amount of deduction
Fixed at P1,000,000
40% of gross income or
gross sales/receipts as the
case may be
As to availability
Available to resident
citizens, non-resident
citizens and resident aliens
Applies to all individual
taxpayers except nonresident aliens, as well as
to corporations

Medical Expenses.

Q: What are the requisites for deductibility?

A:
1. Medical expenses incurred by the
decedent;
2. Incurred within one (1) year prior to the
decedent s death;
3. Must be substantiated with receipts; and
4. Shall not exceed 500,000 whether paid or
unpaid.

Note: Any amount of medical expenses incurred within

1 year from the decedent s death in excess of
P500,000 shall no longer be allowed as a deduction.
Neither can any unpaid amount thereof in excess of
the P500,000 threshold nor any unpaid amount for
medical expenses incurred prior to the 1 year period
from date of death shall be allowed to be deducted
from the gross estate as claim against the estate. (Sec.
86 (A)(6))

Amounts Received Under RA 4917

Q: What is R.A. 4917?

A: It is an Act providing that the retirement benefits

of employees of private firms shall not be subject to
attachment, levy, execution, or any tax whatsoever.
It provides that retirement benefits received by
officials and employees of private firms, whether
individual or corporate, in accordance with a
reasonable private benefit plan maintained by the
employer shall be exempt from all taxes and shall
not be liable to attachment, garnishment, levy or
seizure by or under any legal or equitable process
whatsoever except to pay a debt of the official or
employee concerned to the private benefit plan or
that arising from liability imposed in a criminal
action.

Q: What are the requisites for deductibility?

A:
1. Amounts received by the heirs from the
decedent s employer;
2. Received as a consequence of the death
of the decedent-employee; and
3. Amount is included in the gross estate of
the decedent. (Sec. 86[A][7], NIRC)

Net Share of Surviving Spouse

Q: Is the net share of the surviving spouse included

in the gross estate of the decedent?

A: No. After deducting the allowable deductions

pertaining to the conjugal or community properties
included in the gross estate, the net share of the
surviving spouse must be removed to ensure that
only the decedent s interest in the estate is taxed.
(Sec. 86(C))

Q: Is the capital of the surviving spouse considered

part of the gross estate?

A: Under Section 85 (H) of the NIRC capital pertains

to the property of the spouses brought into the
marriage. Under the Civil Law capital means
property brought by the husband to the marriage
while the properties brought into the marriage by
the wife is called paraphernal property. The said
capital or paraphernal property of the surviving
spouse is deducted from the gross estate of the

decedent.

Q: What are the requirements for the estate of a

non-resident alien decedent to avail of the
deductions?

A: No deduction shall be allowed in case of nonresident not citizen of the Philippines unless the
executor, administrator, or anyone of the heirs, as
the case may be, includes in the estate return
required to be filed the value at the time of the
death, of that part of the gross state of the nonresident not situated in the Philippines.

Exclusions From Estate

Q: What are the exclusions from estate under

special laws?

A:
1. Benefits received by members from the
Government Service Insurance System
(PD 1146) and the Social Security System
(RA 1161, as amended) by reason of
death
2. Amounts received from the Philippine and
United States governments for damages
suffered during the last war (RA 227)
3. Benefits received by beneficiaries residing
in the Philippines under laws
administered by the U.S. Veterans
Administration (RA 360)

4. Bequests, legacies or donations moris

causa to social welfare, cultural, or
charitable organizations (PD 307); but
bequests to religious and educational
institutions are not exempt. ( BIR Ruling
75-001, Jan. 15, 1975)
5. Grants and donations to the Intramuros
Administration (PD 1616). (Mamalateo,
Reviewer in Taxation, 2008 pp. 288-289)

Tax Credit for Estate Taxes Paid in a Foreign

Country

Q: What is Estate Tax Credit?

A: It is a remedy against international double

taxation to minimize the onerous effect of taxing
the same property twice.

Q: Who can avail estate tax credit?

A: Only the estate of a citizen or a resident alien at

the time of death can claim tax credit for any estate
taxes paid in a foreign country.

Q: What are the limitations in estate tax credit?

A:
1. The amount of the credit in respect to the
tax paid to any country shall not exceed
the same proportion of the tax against
which such credit is taken, which the
decedent s net estate situated within
such country taxable under the NIRC
bears to his entire net estate (per country
basis); and
2. The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which
the decedent s net estate situated outside
the Philippines taxable under the NIRC

bears to his entire net estate (overall

basis)

Exemption of Certain acquisitions and

Transmissions

Q: What are exempted from estate tax?

A:
1. Net estates not in excess of P200,000

2. The merger of usufruct in the owner of

the naked title

E.g. Y died leaving a condominium unit,

the naked title belongs to W and usufruct
to F, then F died after two years. Upon
the death of F, the usufruct will merge
into the owner of the naked title W who
shall become the absolute owner of the
said condominium unit. The transfer from
F to W is exempt from estate tax.

3. The transmission or delivery of the

inheritance or legacy by the fiduciary heir
or legatee to the fideicommissary,
Provided that:
a. the substitution must not go beyond
one degree from the heir originally
instituted
b. the fiduciary or the first heir must be
both living at the time of death of
the testator.

E.g. X dies and leaves in his will a lot to his

brother, Y, who is entrusted with the
obligation to transfer the lot to Z, a son of

X, when Z reaches legal age. Y is the

fiduciary heir and Z is the
fideicommissary. The transfer from X to Y
is subject to estate tax. But the
transmission or delivery to Z upon
reaching legal age shall be exempt from
estate tax.

4. The transmission from the first heir,

legatee or donee in favor of another
beneficiary, in accordance with the desire
of the predecessor

5. All bequests, devises, legacies or transfers

to social welfare, cultural and charitable
institutions. Provided:
a. no part of the net income of which
inures to the benefit of any
individual; and
b. Not more than thirty percent (30%)
of the said bequests, devises,
legacies or transfers shall be used by
such institutions for administration
purposes. (Sec. 87, NIRC)

Filing of Notice of Death

Q: In what cases is notice of death required?

A:
1. Transfers subject to tax
2. Even if exempt from tax, if gross value of
estate exceeds P20,000. (Sec. 89, NIRC)

Q: When must notice of death be filed?

A: Within 2 months (60 days) after the decedent s

death or within the same period after qualifying as
executor or administrator. (Ibid.)

Q: Who must file the notice of death?

A: The executor, administrator, or any legal heir.

(Ibid.)

Q: To whom must notice of death be filed?

A: To the CIR. (ibid.)

Estate Tax Return

Q: When is estate tax return required?

A: In cases of:
1. Transfers subject to tax
2. Where gross value of estate exceeds
P200,000
3. Where estate consists of registered or
registrable property, regardless of
amount (Sec. 90[A], NIRC)

Q: Within what period must the estate tax return

be filed?

A: Within 6 months from the decedent s death.

(Sec. 90[B], NIRC)

Q: Is an extension to file an estate tax return

allowed?

A: In meritorious cases but not to exceed 30 days.

(Sec. 90[C], NIRC)

Q: Who shall file the estate tax return?

A:
1. Executor
2. Administrator
3. Any legal heir

Q: Before whom must the estate tax return be

filed?

A:
1. If it is a resident decedent - To an
authorized agent bank, RDO, Collection
Officer, or duly authorized Treasurer in
the city or municipality where the
decedent was domiciled at the time of his
death, or to the Office of the CIR.
2. If it is a non-resident decedent - To the
RDO or to the Office of the CIR. (Sec.
90[D], NIRC)

Q: What are the contents of estate tax return?

A: Must be under oath and shall contain the

following:
1. The value of the gross state of the decent
at the time of his death or in case of a
non-resident, not a citizen of the
Philippines, the part of his gross estate
situated in the Philippines.
2. The deductions allowed from the gross
estate in determining the estate.
3. Such part of the information as may at

the time be ascertainable and such

supplemental data as may be necessary
to establish the correct taxes. (Sec. 90[A],
NIRC)

Q: What are the requirements in case the gross

estate exceeds 2,000,000?

A: The estate tax return shall be accompanied by a

statement which is certified by an independent CPA
which shall contain the following:
1. Itemized assets of the decedent with its
corresponding gross value at the time of
his death, death or in case of a nonresident, not a citizen of the Phil, the part
of his gross estate situated in the
Philippines;
2. Itemized deduction from the gross estate;
and
3. The amount of the tax due whether paid
or still due and outstanding. (Sec. 90[A],
NIRC)

Q: Is there any prohibition from withdrawing

funds in the bank account of a deceased
depositor?

A:
GR: If the bank has knowledge of the death of
the person who maintains a bank deposit alone
or jointly with another, it shall not allow any
withdrawal from said deposit account unless the
CIR has certified that estate taxes have been
paid. (Sec. 97, NIRC)

XPN: The CIR may allow the administrator or

anyone of the heirs to withdraw an amount not
exceeding 20,000 without the certification that
estate taxes have been paid.

Q: What shall be the liability of a co-depositor who

was able to withdraw funds from the account of a
deceased depositor without paying the estate tax?

A: They shall be held liable for perjury because all

withdrawal slips contain a statement to the effect
that their co-depositors are still living at the time of
the withdrawal by any one of the joint depositors
and such statements are deemed under oath.

Q: Distinguish
return .

notice of death

from

A:
NOTICE OF DEATH
ESTATE TAX RETURNS
(ETR)
Conditions required for its application
1. In all cases of transfers
subject to tax.
2. Where though exempt
from tax, the gross
value of the estate
exceeds P20,000.
1. Transfers subject to tax
where gross value of
estate exceeds
P200,000;
2. Where estate consists
of registered or
registrable property,
regardless of amount.
Who files
1. Executor
2. Administrator
3. Any of the legal heirs
Where to file
Commissioner of Internal
Revenue
1. Resident decedent

estate tax

a. Authorize agent
bank
b. Revenue District
Officer
c. Duly authorized
City or Municipal
treasurer of the
place of the
decedent s domicile
at the time of his
death or any other
place where the CIR
permits the estate
tax return to be
filed (Sec 90 D of
the NIRC)

2. Non-Resident
decedent- with the
Commissioner of
Internal Revenue:
a. In case of nonresident citizen or
non-resident alien
with executor or
administrator in the
Phil the ETR
together with TIN is
filed with the RDO;
b. In case the executor
or administrator is
not registered the
ETR together with

TIN filed with the

RDO having
jurisdiction over the
executor or
administrator s
legal residence;
c. In the absence of
an executor or
administrator in the
Phil the ETR
together with the
TIN shall be filed
before RDO No. 39South Quezon City;
d. Any other place
where the CIR
permits the estate
tax return to be
filed (Sec 90[D],
NIRC).

Period of filing
Within 2 months (60 days)
after the decedent s death
or within the same period
after qualifying as executor
or administrator.
Within 6 months from the
decedent s death, except in
meritorious cases where
the Commissioner may
grant reasonable extension
not exceeding 30 days.

Q: When must the taxpayer pay the estate tax?

A: Upon filing, under the

Pay as you file system .

Q: May an extension to pay estate tax be granted?

A: Yes, if the Commissioner finds that such payment

would impose undue hardships upon the estate or
any heir and shall:
1. Not exceed 5 years in case of judicial
settlement;
2. Not exceed 2 years in case of extrajudicial
settlement.

Q: What are the requisites for the granting of

extension to pay the estate tax?

A:
1. The request for extension must be filed
before the expiration of the original
period to pay which is within 6 months
from death;
2. There must be a finding that the payment
on the due date of the estate tax would
impose undue hardship upon the estate
or any of the heirs;

3. The extension must be for a period not

exceeding 5 years if the estate is settled
judicially or 2 years if settled
extrajudicially; and
4. The Commissioner may require the
posting of a bond in an amount not

exceeding double the amount of tax to

secure the payment thereof.

Q: Remedios, a resident citizen, died on November

10, 2006. She died leaving three condominium
units in Quezon City valued at 5 million each.
Rodolfo was her only heir. He reported her death
on December 6, 2006 and filed the estate tax
return on March 30, 2007. Because she needed to
sell one unit of the condominium to pay for the
estate tax she asked the CIR to give her one year
to pay the estate tax due. The CIR approved the
request of extension of time provided that the
estate tax be computed on the basis of the value
of property at the time of payment of tax.

1. Does CIR have the power to extend the

payment of estate tax?
2. Does the condition that the basis of the
estate tax will be the value at the time of the
payment have legal basis?

A:
1. Yes. The CIR may allow an extension of
time to pay the estate tax if the payment
on the due date would impose undue
hardship upon the estate or any of the
heirs. The extension in any case, will not
exceed 2 years if the estate is not under
judicial settlement of 5 years if it is under
judicial settlement. The CIR may require
the posting of a bond to secure the
payment of the tax. (Sec. 91[B], NIRC)

2. No. The valuation of properties

comprising the estate of a decedent is the
fair market as of the time of death. No
other valuation date is allowed by law.
(Sec. 88, NIRC) (2007 Bar Question)

Q: What are the effects for granting an extension

of time to pay estate taxes?

A:
1. The amount shall be paid on or before expiration
of the extension and running of the statute of
limitations for assessment shall be suspended for
the period of any of such extension.
2. The CIR may require a bond not exceeding
double the amount of the tax and with such
sureties as the CIR deems necessary when the
extension of payment is granted.
3. Any amount paid after the statutory due date of
the tax, but within the extension period, shall be
subject to interest but not to surcharge.
(Sec. 91(B))

Q: What are the instances where the request for

extension of time to pay estate tax should be
denied?

A: No extension if there is:

1. Negligence
2. Intentional disregard of rules and
regulations
3. Fraud.

Q: Who shall pay the estate tax?

A:
1. The executor or administrator, before
delivery to any beneficiary of his
distributive share.
2. The beneficiary, to the extent of his
distributive share in the estate, shall be
subsidiarily liable for the payment of such
portion of the estate tax as his
distributive share bears to the value of
the total net estate.

Q: What are the instances when a Certificate of

Payment of Tax from the Commissioner is
required?

A:
1. Before a judge shall authorize the
executor or judicial administrator to
deliver a distributive share to any party
interested in the estate
2. Before the Register of Deeds shall
register in the Registry of Property any
document transferring real property or
real rights therein or any chattel
mortgage, by way of gifts inter vivos or
mortis causa, legacy or inheritance
3. When a lawyer, by reason of his official
duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation inter
vivos or mortis causa, legacy or
inheritance
4. When a notary public, by reason of his
official duties, intervenes in the
preparation or acknowledgment of
documents regarding partition or disposal
of donation inter vivos or mortis causa,
legacy or inheritance
5. When a government officer, by reason of
his official duties, intervenes in the
preparation or acknowledgment of
documents regarding partition or disposal
of donation inter vivos or mortis causa,
legacy or inheritance;

6. Before a debtor of the deceased pay his

debts to the heirs, legatee, executor or
administrator of his creditor
7. Before a transfer to any new owner in the
books of any corporation, sociedad
anonima, partnership, business, or
industry organized or established in the
Philippines any share, obligation, bond or
right by way of gift inter vivos or mortis
causa, legacy or inheritance
8. Before a bank, which has knowledge of
the death of a person who maintained a
bank deposit account alone, or jointly
with another, shall allow any withdrawal
from the said deposit account

Q: When is said certification not required?

A: In cases when withdrawalof bank deposit:

1. Has been authorized by the Commissioner
2. The amount does not exceed P20,000.

Q: When can the estate be distributed?

A: Upon payment of the estate tax, the

administrator shall deliver the distributive share in
the inheritance to any heir or beneficiary. The
estate clearance tax issued by the CIR or the RDO
having jurisdiction over the estate will serve as the
authority to distribute the remaining/distributive
properties/share in the inheritance of the heir or
beneficiary. In case of installment payments, the
clearance shall be released only with respect to the
property the corresponding tax of which has been
paid. (Section 94, NIRC).

Q: May estate tax be paid in installment?

A: Yes. In case the available cash of the estate is not

sufficient to pay the total estate tax liability and the
clearance shall be released with respect to the
property the corresponding/computed tax on which
has been paid.

Q: A tax refund was filed by a taxpayer. Pending

said action, taxpayer died. Will the tax refund
form part of his gross estate?

A: It depends. If there is a legal and factual basis, it

will. Otherwise, it will not be included.

Q: Enumerate the three situations when deficiency

occurs.

A:
1. A return was filed but paid less than the
amount of tax due;
2. A return was filed but did not pay any tax;
3. No return was filed, therefore, no tax was
paid.

Q: Differentiate deficiency estate tax (Sec. 93)

from delinquency estate tax (Title X).

A: Deficiency arises when tax paid is less than the

amount due while delinquency arises when there is
either failure to pay amount due or refusal to pay
the tax due.

DONOR S TAX

Q: What is donation?

A: Donation is an act of liberality whereby a person

(donor) disposes gratuitously of a thing or right in
favor of another (donee) who accepts it. (Art. 725,
Civil Code)

Q: What are the kinds of donations?

A:
1. Donation inter vivos - a donation made
between living persons. Its perfection is at
the moment when the donor knows the
acceptance of the donee. It is subject to
donor s tax.

2. Donation moris causa

a donation which
takes effect upon the death of the donor.
It is subject to estate tax.

Definition

Q: What is donor s tax?

A: It is an excise tax imposed on the privilege of

transferring property by way of a gift inter vivos
based on pure act of liberality without any or less
than adequate consideration and without any legal
compulsion to give.

Q. What is the subject of donor s tax?

A. The subject of donor s tax is the gift or donation.

Article 725 of the Civil Code defines a gift or
donation as an act of liberality whereby a person
disposes gratuitously of a thing or right in favor of
another who accepts it.

Q: What law governs the imposition of donor s

tax?

A: The law in force at the time of the

perfection/completion of the donation. (Sec. 11,
R.R. 2-2003)

Nature of Donor s Tax

Q: What is the nature of donor s tax?

A: It is an excise tax on the privilege of the donor to

give or on the transfer of property by way of gift
inter vivos. It is not a property tax.

Purpose/Object of Donor s Tax

Q: What are the purposes of imposing donor s tax?

A: To:
1. Raise revenues
2. Tax the wealthy and to reduce certain
other excise taxes
3. Discourage inter vivos transfers of
property which could reduce mortis causa
transfers on which a higher tax (estate
tax) can be collected
4. Prevent avoidance of income tax through
the device of splitting income among
numerous donees who are usually
members of a family or into many trusts,
with the donor thereby escaping the
effect of the progressive rates of income
taxation

Requisites of Valid Donation

Q: What are the requisites for a gift to be taxable?

A: CaDonAcAct
1. Capacity of donor to donate

Note: The donor s capacity shall be determined as of

the time of the making of the donation (Art. 737, NCC)

2. Donative intent

Note: Donative intent is necessary only in cases of

direct gift. If the gift is indirectly taking place by way of
sale, exchange or other transfer of property as
contemplated in cases of transfers for less than
adequate and full consideration (Sec. 100, NIRC), not
always essential to constitute a gift.

3. Acceptance by the donee

4. Actual or constructive delivery of gift

Q: What is the tax treatment in case of donations

made by spouses?

A: Husband and wife are considered as separate

and distinct taxpayer s for purposes of the donor s
tax. However, if what was donated is a conjugal or
community property and only the husband signed
the deed of donation, there is only one donor for
donor s tax purposes, without prejudice to the right
of the wife to question the validity of the donation
without her consent pursuant to the pertinent
provisions of the Civil Code of the Philippines and
the Family Code of the Philippines. (1st Par., Sec. 12,
RR 2-2003)

Q: What are the transfers subject to donor s tax?

A:
1. Transfer in trust or otherwise, whether
the gift is direct or indirect and whether
the property is real or personal, tangible
or intangible;
2. Include not only the transfer of ownership
in the fullest sense but also the transfer of
any right or interest in property, but less
than title;
3. Where property, other than real property
subject to capital gains tax, is transferred
for less than an adequate and full
consideration in money or money s
worth, then the amount by which the
FMV of the property exceeded the value
of the consideration shall, for the purpose
of the donor s tax, be deemed a gift, and
shall be included in computing the
amount of gifts made during the calendar
year. Donative intent therefore, is not
always essential to constitute a gift.
4. Renunciation by the surviving spouse of
his/her share in the conjugal partnership
or absolute community after the
dissolution of the marriage in favor of the
heirs of the deceased spouse or any other
person/s is subject to donor s tax;
5. However, general renunciation by an heir,
including the surviving spouse, of his/her
share in the hereditary estate left by the
decedent is not subject to donor s tax,
unless specifically and categorically done
in favor of identified heir/s to the
exclusion or disadvantage of the other coheirs in the hereditary estate.

Note: All donations made in one year are taxed at the

same rate as if they had been made at one time. A new
computation of donor s tax is made for gifts given at
each succeeding year.

Q: Your bachelor client, a Filipino residing in

Quezon City, wants to give his sister a gift of
P200,000. He seeks your advice, for purposes of
reducing if not eliminating the donor's tax on the
gift, on whether it is better for him to give all of
the P200,000.00 on Christmas 2001 or to give
P100,000.00 on Christmas 2001 and the other
P100,000.00 on January 1, 2002. Please explain
your advice.

A: I would advise him to split the donation. Giving

the P200,000 as a one-time donation would mean
that it will be subject to a higher tax bracket under
the graduated tax structure thereby necessitating
the payment of donor's tax. On the other hand,
splitting the donation into two equal amounts of
P100,000 given on two different years will totally
relieve the donor from the donor s tax because the
first Pl00, 000 donation in the graduated brackets is
exempt (Sec. 99, NIRC). While the donor s tax is
computed on the cumulative donations, the
aggregation of all donations made by a donor is
allowed only over one calendar year. (2001 Bar
Question)

Q: When will donor s tax apply?

A: The donor s tax shall not apply unless and until

there is a completed gift. (Sec. 11, R.R. 2-2003)

Q: When does a transfer become complete and

therefore taxable?

A: A transfer becomes complete and taxable only

when, the donor has divested himself of all
beneficial interests in the property transferred and
has no power to recover any such interest in
himself or his estate.

Q: When does an incomplete gift become a

complete one, subject to donor s tax?

A: A gift that is incomplete because of reserved

powers becomes complete when either:

1. The donor renounces the power to

recover; or
2. His right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of
the donor s death. (Ibid.)

Q: What are the elements of remuneratory

donation?

A:
1. A person gives to another a thing or right;
2. On account of the latter s merit or
services rendered by him to the donor;
and
3. The giving does not constitute a
demandable debt.

Note: Donations made by a corporation to its

deceased officer out of gratitude for past services are
subject to donor s tax. Past services rendered without
relying on a promise express or implied that such
services would be paid for in the future do not
constitute a demandable debt. Thus, the amount given
by the corporation to the heirs of the deceased officer
of the corporation as gratitude for past services
rendered by the officer is subject to donor s tax.

Q: Are onerous donations subject to donor s tax?

A:
GR: No, since there is no gratuitous disposal.

XPNs:
1. Where the transfer is for less than an
adequate and full consideration in money
or money s worth; or
2. The gift imposes upon the donee a

burden which is less than the value of the

thing given;

Note: The excess of the fair market value of the

property over the actual value of the consideration
shall be subject to donor s tax.

Q: A, an individual, sold to B, her sister-in-law, his

lot with a market value of P1,000,000 for
P600,000. A's cost in the lot is P100,000. B is
financially capable of buying the lot. A also owns X
Co., which has a fast growing business. A sold
some of her shares of stock in X Co. to her key
executives in X Co. These executives are not
related to A. The selling price is P3, 000,000, which
is the book value of the shares sold but with a
market value of P5, 000,000. A's cost in the shares
sold is P1, 000,000. The purpose of A in selling the
shares is to enable her key executives to acquire a
propriety interest in the business and have a
personal stake in its business. Explain if the above
transactions are subject to donor's tax.

A: The first transaction where a lot was sold by A to

her sister-in-law for a price below its fair market
value will not be subject to donor's tax if the lot
qualifies as a capital asset. The transfer for less than
adequate and full consideration, which gives rise to
a deemed gift, does not apply to a sale of property
subject to capital gains tax (Sec. 100, NIRC).
However, if the lot sold is an ordinary asset, the
excess of the fair market value over the

consideration received shall be considered as a gift

subject to the donor's tax. The sale of shares of
stock below the fair market value thereof is subject
to the donor's tax pursuant to the provisions of
Section 100 of the Tax Code. The excess of the fair
market value over the selling price is a deemed gift.
(1999 Bar Question)

TRANSFERS WHICH MAY BE CONSTITUTED AS

DONATION

Condonation/remission of debt

Q: What is the rule regarding forgiveness/

condonation of indebtedness?

A: If the creditor condones the indebtedness of the

debtor the following rules apply:
1. On account of debtor s services to the
creditor the same is in taxable income to
the debtor.
2. If no services were rendered but the
creditor simply condones the debt, it is
taxable gift and not a taxable income.

Transfer for Less Than Adequate and Full

Consideration

Q: What is the rule regarding transfer for less than

adequate and full consideration?

A: GR: The property is transferred for less than

adequate and full consideration in money or
money s worth, the amount by which the FMV
exceeds the consideration shall be deemed a gift
and be included in computing the amount of gifts
made during the year. It is as if the property was
donated but in order to avoid paying donor s tax,
the donor opted to transfer the property for

inadequate consideration.

XPN: Where property transferred is real property

located in the Philippines considered as capital
asset, the donor s tax is not applicable but the final
income tax of 6% of the fair market value or gross
selling price, whichever is higher.

CLASSIFICATION OF DONOR

Q: Who are liable to pay donor s tax?

A:
1.
a.
b.
c.
d.

Taxable within and outside Philippines:

Resident citizen
Non-resident citizen
Resident alien
Domestic corporation

2. Taxable only within the Philippines:

a. Non-resident aliens
b. Foreign corporation

Note: A corporation, domestic or foreign, cannot be

made liable to pay estate tax, but may be liable to pay
donor s tax.

Q: What are the rates of tax payable by the donor?

A:
1. Where the donee is a relative
The donor
is taxed according to graduated tax rates
in Section 99 (A), NIRC. Under said
section, the tax for each calendar year

shall be computed on the basis of the

total net gifts made during the calendar
year in accordance with the following
schedule:

Over
But not
over
The tax shall
be exempt
Plus
of excess
over

100K

100K
200K
0
2%
100K
200K
500K
2,000
4%
200K
500K
1M
14,000
6%
500K

1M
3M
44,000
8%
1M
3M
5M
204,000
10%
3M
5M
10M
404,000
12%
5M
10M

1,004,000
15%
10M

2. When the donee or beneficiary is stranger

- the tax payable by the donor shall be
thirty percent (30%) of the net gifts.

Q: When the donee or beneficiary is a stranger,

the tax payable by the donor shall be 30% of the
net gifts. For purposes of this tax, who is a
stranger?

A: A stranger is the one who is not a brother, sister,

spouse, ancestor and lineal descendant, or a

relative by consanguinity in the collateral line
within the 4th civil degree of the donee. (Sec. 98,
NIRC)(2000 Bar Question)

Note: A donation is considered made to a stranger

when it is:
I. Between business organizations
II. Between an individual and a business
organization (Sec 10B, RR 02-03)

Determination of Gross Gift

Q: Define gross gifts.

A: All property, real or personal, tangible or

intangible, that was given by the donor to the
donee by way of gift, without the benefit of any
deduction. (Sec. 104, NIRC)

Q: Define net gift.

A: Net gift is the net economic benefit from the

transfer that accrues to the donee.

Note: If a mortgaged property is transferred as a gift,

but imposing upon the donee the obligation to pay the
mortgage liability, then the net gift is measured by
deducting from the fair market value of the property
the amount of mortgage assumed.

Q: Kenneth Yusoph owns a commercial lot which

she bought many years ago for P1 Million. It is
now worth P20 Million although the zonal value is
only P15 Million. She donates one-half pro-indiviso
interest in the land to her son Dino on 31
December 1994, and the other one-half proindiviso interest to the same son on 2 January
1995.

1. How much is the value of the gifts in 1994 and

1995 for purposes of computing the gift tax?
Explain.
2. The Revenue District Officer questions the
splitting of the donations into 1994 and 1995.
He says that since there were only two (2)
days separating the two donations they
should be treated as one, having been made
within one year. Is he correct? Explain.
3. Dino subsequently sold the land to a buyer
for P 20 Million. How much did Dino gain on
the sale? Explain.
4. Suppose, instead of receiving the lot by way
of donation, Dino received it by inheritance.
What would be his gain on the sale of the lot
for P20 Million? Explain.

A:

1. The value of the gifts for purposes of

computing the gift tax shall be P7.5million
in 1994 and P7.5million in 1995. In valuing
a real property for gift tax purposes the
property should be appraised at the
higher of two values as of the time of
donation which are (a) the fair market
value as determined by the Commissioner
(which is the zonal value fixed pursuant to
Section 16(e) of the Tax Code), or (b) the
fair market value as shown in the
schedule of values fixed by the Provincial
and City Assessors. The fact that the
property is worth P20 million as of the
time of donation is immaterial unless it
can be shown that this value is one of the
two values mentioned as provided under
Sec. 81 of the Tax Code.

2. No because the computation of the gift

tax is cumulative but only insofar as gifts
made within the same calendar year.
There is no legal justification for treating
two gifts effected in two separate
calendar years as one gift.

3. Dino gained an income of 19 million from

the sale. Dino acquires a carry-over basis
which is the basis of the property in the
hands of the donor or P1 million. The gain
from the sale or other disposition of
property shall be the excess of the
amount realized therefrom over the basis
or adjusted basis for determining gain
[Sec. 34(a), NIRC]. Since the property was
acquired by gift, the basis for determining
gain shall be the same as if it would be in
the hands of the donor or the last
preceding owner by whom the property
was not acquired by gift. Hence, the gain
is computed by deducting the basis of P1
million from the amount realized which is
P20 million.

4. If the commercial lot was received by

inheritance, the gain from the sale for P20
million is P5 million because the basis is
the fair market value as of the date of
acquisition. The stepped-up basis of P15
million which is the value for estate tax
purposes is the basis for determining the

gain. (Sec. 34(b)(2), NIRC)(1995 Bar

Question)

Q: What is the difference between cumulative and

splitting method?

A:
Cumulative
Splitting
When the donor makes
two or more donations
within the same calendar
year, it is required that
the said donations be
included in the return for
the last donation. It will
not amount to double
taxation because the tax
paid for the previous
methods will be
considered as tax credit
for succeeding donations.
The donor makes two or
more donations during
different calendar years.

Q: What is the significance of the two methods

mentioned?

A: The significance is in relation to donees. For

relatives, the graduated tax rates are applicable
while for strangers, a fixed rate of 30% is applicable.

XPN: When the amount of donation is P10,000,000

or above, the cumulative method is no longer
relevant since in that case, the rate applicable is
15%,hence, it is as if the rate is fixed.

Note: For strangers, whether the method to be used is

cumulative or splitting, it is immaterial since any
donation made to them is subject to a fixed rate of
30%.

Composition of Gross Gift

Q: What are included in the gross gifts?

A:
1. For resident citizen, non-resident citizen,
and resident alien(wherever situated);
a. Real property wherever situated
(within & without the Philippines);
b. Personal property wherever
situated, tangible or intangible.
2. For non-resident alien (only within);
a. Real property situated within the
Philippines;
b. Personal property:
i. Tangible property situated
within the Philippines
ii. Intangible personal property
with situs in the Philippines
unless exempted on the
basis of reciprocity

Valuation of Gifts Made in Property

Q: How are gross gifts valued?

A: If the gift is:

1. Personal property - the fair market
valueof the property given at the time of
the gift shall be the value of the gross gift.
2. Real property - the fair market value at
the time of donation or the value fixed by
the assessor, whichever is higher. (Sec.
102)

Tax Credit for Donor s Taxes Paid in a Foreign

Country

Q: Discuss Donor s Tax Credit.

A: The donor s tax imposed by the Tax Code upon a

donor who was a citizen or a resident at the time of
donation shall be credited with the amount of any
donor s taxes of any character and description
imposed by the authority of a foreign country.

Q: Who are entitled to claim tax credit?

A: Only donors who are citizens or residents at the

time of the donation.

Q: What are the limitations to the tax credit?

A: The following are the limitations to the tax

credit:
1. The amount of credit shall not exceed the
same proportion of the tax against such
credit is taken, which the net gifts

situated within such country taxable

under donor s tax bears to the entire net
gifts (Per country basis)
2. The amount of the tax credit shall not
exceed the same proportion of the tax
against such credit is taken, which the
donor s net gifts situated outside the
Philippines taxable under donor s tax
bears to his entire net gifts (Overall basis)

Q: What is the formula in computing the donor s

tax credit?

A: Limitation A (per country):

Net gifts (foreign country) X Phil. Donor s tax
Net gifts (world)

Limitation B (by total)

Net gifts (outside Philippines) X Phil. Donor s tax

Net gifts (world)

EXEMPTIONS OF GIFTS FROM DONOR S TAX

Q: What are the deductions from donor s tax?

A:
1. Encumbrances on the property donated,
if assumed by the donee;
2. Amount specifically provided by the
donor as a diminution of the property
donated.

Q: Enumerate the transactions exempt from

donor s tax.

A:
1. Donation for political campaign purposes
(Sec. 99[C], NIRC

2. Certain gifts made by residents (Sec.

101[A], NIRC)
3. Certain gifts made by non-residents Sec.
101[B], NIRC)
4. Donation of intangibles subject to
reciprocity (Sec. 104, NIRC)
5. Donation for athlete s prizes and awards
(R.A. 7549)
6. Donation under the Adopt-a-School
Program (R.A. 8525)
7. Exemption under other special laws.

Donations For. Political Campaign Purposes.

Q: Are donations for political campaign purposes

exempted from donor s tax?

A: Any contribution in cash or in kind to any

candidate, political party, or coalition of parties for
campaign purposes, reported to COMELEC shall not
be subject to payment of any gift tax (Sec. 99[C],
NIRC; RR 2-2003)

Q: Are contributions to a candidate in an election

subject to donor's tax? On the part of the
contributor, is it allowable as a deduction from
gross income?

A: No, provided the recipient candidate had

complied with the requirement for filing of returns
of contributions with the Commission on Elections
as required under the Omnibus Election Code.

The contributor is not allowed to deduct the

contributions because the said expense is not
directly attributable to, the development,
management, operation and/or conduct of a trade,
business or profession. Furthermore, if the
candidate is an incumbent Government official or
employee, it may even be considered as a bribe or a
kickback. (1998 Bar Question)

Q: X is a friend of Y, the chairman of Political Party

Z, who wants to run for President in the 2004
elections. Knowing that Y needs funds for posters
and streamers, X is thinking of donating to Y P150,
000.00 for her campaign. She asks you whether
her intended donation to Y will be subject to the
donor's tax. What would your answer be? Will
your answer be the same if she were to donate to
Political Party Z instead of to Y directly?

A: The donation to Y, once she becomes a

candidate for an elective post, is not subject to
donor's tax provided that she complies with the
requirement of filing returns of contributions with
the Commission on Elections as required under the
Omnibus Election Code.

The answer would be the same if X had donated the

amount to Political Party Z instead of to Y directly
because the law places in equal footing any
contribution to any candidate, political party or
coalition of parties for campaign purposes. (Sec.
99(C), NIRC) (2003 Bar Question)

Certain Gifts made By Residents.

Q: What are the gifts made by a resident

citizen/alien that is considered exempt from
donor s tax?

A:
1. Specific exemption - net gifts of the
amount of P100,000 or less are exempt;
2. Dowries or gifts made on account of
marriage and before its celebration or
made within one year thereafter by
parents to each of their legitimate,
recognized natural, or adopted children to
the extent of the first Ten thousand pesos
(P10,000);
3. Gifts made to or for the use of the
National Government or any entity
created by any of its agencies which is not
conducted for profit, or to any political
subdivision of the said Government;
4. Gifts in favor of: CARTER CPS

a.
b.
c.
d.
e.
f.
g.
h.
i.

Charitable
Accredited NGOs
Religious
Trust foundations
Educational institutions
Research institutions
Cultural foundations
Philanthropic organizations
Social welfare corporations

Note: In order to be exempt from donor s tax and to

claim full deduction of the donation given to qualified
donee institution duly accredited by the Philippline
Council for NGO certification, Inc. (PCNC), the donor
engaged in business shall give a notice of donation on
every donation worth at least 50,000 to the RDO which
has jurisdiction over his place of business within 30
days after the receipt of the qualified donee
institution s duly issued Certificate of Donation, which
shall be attached to the said Notice of Donation,
stating that not more than 30% of said donations/gifts
for the taxable year shall be used by such accredited
non-stock, non-profit corporation/NGO institution for
administration purposes (Domondon, Taxation
Reviewer - Volume 1, 2008 ed.).

Note: A non-profit educational and/or charitable

corporation is one which is incorporated as a non-stock
entity paying no dividends, governed by trustees who
received no compensation, and devoting all its income
to the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.

Q: What are the requisites for exemption of

dowries?

A:
1. The gift is given on account of marriage;
2. The gift is given before the celebration of
marriage or within 1 year thereafter;
3. Donor is the parent or both parents;
4. Donee is the legitimate, recognized
natural or legally adopted child of the
donor; and
5. Maximum amount of the exemption is
P10,000 for each child that may be
claimed by each parent.

Note: Both parents may give dowries and gifts on

account of marriage. Each parent is entitled to the
exemption. This has the effect of splitting the value of
the gift into half for both spouses so each spouse can
claim the exemption. However, both spouses must file
separate returns because the husband and the wife
are considered as distinct entities for purposes of
donor s tax (Sec. 12, RR 2003). However where there is
failure to prove that the donation was actually made
by both spouses, the donation is taxable as the
exclusive act of the husband, without prejudice to the
right of the wife to question the validity of the
donation without her consent pursuant to the
provisions of the Civil Code.

Q: What are the requisites for the exemption of

gifts made to the CARTER CuPS?

A:
1. Donee is incorporated as a non-stock,
non-profit entity;
2. Governed by trustees;
3. Trustees receive no compensation;
4. Donee devotes all its income, whether

students' fees or gifts, donation, subsidies

or other forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation; and
5. Not more than 30% of the donation is
used for administrative purposes.

Q: What conditions must occur in order that all

grants, donations and contributions to non-stock,
non-profit private educational institutions may be
exempt from the donor's tax under Sec. 101 (a) of
the Tax Code?

A:
1. Not more than thirty percent (30%) of
said gifts shall be used by such donee for
administration purposes;
2. The educational institution is
incorporated as a non-stock entity,
3. paying no dividends;
4. governed by trustees who receive no
compensation; and
5. Devoting all its income, whether students'
fees or gifts, donations, subsidies or other
forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation. (Sec. 101[A][3], NIRC)
(2000 Bar Question)

Q: The Congregation of Mary Immaculate donated

a parcel of land and a dormitory building located
along Espana St. in favor of Sisters of the Holy
Cross, a group of nuns operating a free clinic and
high school teaching basic spiritual values. Is the
donation subject to donor s tax?

A: No. Gifts in favor of educational and/or

charitable, religious, social welfare corporation or
cultural institution, accredited non-government
organization, trust or philanthropic organization or
research institution or organization are exempt
from donor s tax, provided, that, no more than 30%
of the gifts are used for administration purposes.
The donation being in the nature of real property
complies with the utilization requirement. (Sec.
101[A][3], NIRC) (2007 Bar Question)

Certain Gifts Made By Non-Residents.

Q: What gifts made by a non-resident, not a citizen

of the Philippines are exempt from donor s tax?

A:
1. Gifts made to or for the use of the
National Government or any entity
created by any of its agencies which is not
conducted for profit, or to any political
subdivision of the said Government.
2. Gifts in favor of an educational and/or
charitable, religious, cultural or social
welfare corporation, institution,
foundation, trust or philanthropic
organization or research institution or
organization: Provided, however, That not
more than thirty percent (30%) of said
gifts shall be used by such donee for
administration purposes.(Sec. 101[B],
NIRC)

Donation of Intangible, Subject to Reciprocity

Q: Give the rules on tax credit for donor's taxes

paid to a foreign country.

A:
1. In general - The tax imposed by this Title
upon a donor who was a citizen or a
resident at the time of donation shall be
credited with the amount of any donor's
tax of any character and description
imposed by the authority of a foreign
country.
2. Limitations on credit - The amount of the
credit taken under this Section shall be
subject to each of the following
limitations:

a. The amount of the credit in respect

to the tax paid to any country shall
not exceed the same proportion of
the tax against which such credit is
taken, which the net gifts situated
within such country taxable under
this Title bears to his entire net gifts;
and
b. The total amount of the credit shall
not exceed the same proportion of
the tax against which such credit is
taken, which the donor's net gifts
situated outside the Philippines
taxable under this title bears to his
entire net gifts. (Sec. 104, NIRC)

Q: What are the requisites before reciprocity

clause applies?

A:
1. The foreign country of which the donor is

a citizen and resident at the time of the

gift:
a. Did not impose a donor s tax;
b. Allowed a similar exemption from
donor s tax with respect to
intangible personal property owned
by Filipino citizens not residing in
that foreign country.

2. The property is an intangible; and

3. The donor is a non-resident of the
Philippines.

Donation of Athletes Prizes and Awards.

Q: What are the requirements for exemption from

donor s tax of athlete s prizes and awards?

A:
1. The donation must be prizes and awards
given to athletes in local and international
tournaments and competitions;
2. held in the Philippines or abroad; and
3. sanctioned by their respective sports
association. (Sec. 1, R.A. 7549)

Donations Under. Adopt-A-School

Program.

Q: What is the exemption provided under adopt-aschool program?

A: Under R.A. 8525, any aid, help, contribution or

donation provided by an adopting private entity to
a government school, whether elementary,
secondary or tertiary are exempt from donor s
taxes. The assistance may be in the form of, but not
limited to infrastructure, teaching, and skills
development, learning, support, computer and
science laboratories and food and nutrition.

Exemption Under Other Special Law.

Q: What are exempted from donor s tax under

other special laws?

A:
1. Donation to International Rice Research
Institute (IRRI)
2. Donation to Ramon Magsaysay Award
Foundation
3. Donation to Philippines Inventors
Convention (PIC)
4. Donation to Integrated Bar of the
Philippines (IBP)
5. Donation to the Development Academy
of the Philippines
6. Donation to social welfare, cultural or
charitable institution, no part of the net
income of which inures to the benefit of
any individual, if not more than 30% of
the donation shall be used by the donee
for administration purposes
7. Donation to Aquaculture Department of
the Southeast Asian Fisheries
Development Center of the Philippines
8. Donation to the National Museum
9. Donation to the National Library

10. Donation to the National Social Action

Council
11. Donation to the Philippine American
Cultural Foundation
12. Donation to Task Force on Human
Settlement on the donation of
equipment, materials, and services

PERSON LIABLE FOR DONOR S TAX

Q: Who are required to file donor s tax return?

A: Any person making a donation unless the

donation is specifically exempted under NIRC or
other special laws, is required for every donation to
accomplish under oath a donor s tax return in
duplicate.

Q: What is the formula in computing taxable

donation?

A:
1. On the first donation of the year

Gross Gift
Less: deductions/exemption
-----------------------------------------Net gift
x Tax rate
-----------------------------------------Donor s tax

2. On subsequent donation during the year

Gross gift
Less: Deductions/exemptions
------------------------------------------Net gift

Net gift
Add: Prior net gifts
----------------------Aggregate net gifts
x Applicable tax rate
-----------------------------Donor s tax on aggregate gifts
Less: prior donor s tax paid
-------------------------------------------Donor s tax paid on this date

VALUE-ADDED TAX

Q: What is value-added tax (VAT)?

A: It is an indirect tax and the amount of tax may,

by law, be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or
services. (Sec. 105, NIRC)

It is a tax on the estimated market value added to a

product or material at each stage of its
manufacture or distribution, ultimately passed on
to the consumer.

Q: What is the nature of VAT?

A: It is an indirect tax. VAT is a tax on consumption

levied on the sale, barter, exchange, or lease of
goods or properties and services in the Philippines
and on importation of goods into the Philippines

The seller is the one statutorily liable for the

payment of the tax but the amount of the tax may
be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services.
However, in the case of importation, the importer is
the one liable for the VAT. (Sec 4.105-2 RR 16-2005)

Q: Explain VAT as an indirect tax.

A: The amount of tax paid on the goods, properties

or services bought, transferred, or leased may be
shifted or passed on by the seller, transferor, or
lessor to the buyer, transferee or lessee. Unlike a
direct tax, such as the income tax, which primarily
taxes an individual s ability to pay based on his
income or net wealth, an indirect tax, such as the
VAT, is a tax on consumption of goods, services, or
certain transactions involving the same. The VAT,
thus, forms a substantial portion of consumer
expenditures.

Further, in indirect taxation, there is a need to

distinguish between the liability for the tax and the
burden of the tax. As earlier pointed out, the
amount of tax paid may be shifted or passed on by
the seller to the buyer. What is transferred in such
instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the
selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What
is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of
the tax. Stated differently, a seller who is directly
and legally liable for payment of an indirect tax,
such as the VAT on goods or services is not
necessarily the person who ultimately bears the

burden of the same tax. It is the final purchaser or

consumer of such goods or services who, although

not directly and legally liable for the payment

thereof, ultimately bears the burden of the tax.
(Contex v. CIR, GR No. 151135, July 2, 2004)

Q: What is the effect of VAT being an indirect tax

on exemptions?

A: If a special law merely exempts a party as a seller

from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from
its indirect burden of the VAT shifted to it by its
VAT-registered suppliers, the purchase transaction
is not exempt. It is because VAT is a tax on
consumption, the amount of which may be shifted
or passed on by the seller to the purchaser of the
goods, properties or services. (CIR v. Seagate
Technology, G.R. No. 153866, Feb. 11, 2005)

Q: How are transactions classified under the VAT

system?

A:
1. VAT taxable transactions
a. Subject to 12% VAT rate
b. Zero-rated transactions
2. Exempt transactions

Q: Define taxable transactions under the VAT law.

A: Taxable transactions are those transactions

which are subject to VAT either at the rate of 12%
(effective January 1, 2006, VAT rate was increase
from 10-12%) or 0%, and the seller shall be entitled
to tax credit for the VAT paid on purchases and
leases of goods, properties or services
(Commissioner v. Cebu Toyo Corporation, G.R. No.
149073, February 16, 2005)

Q: Mr. A, a VAT-exempt retailer sells to Mr. O, a

non-VAT exempt purchaser. Is Mr. O liable to pay
VAT on the transaction?

A: Yes. The purchaser is subject to VAT because it is

merely added as part of the purchase price and not
as a tax because the burden is merely shifted. The
seller is still exempt because it could pass on the
burden of paying the tax to the purchaser.

Q: Lily s Fashion Inc is a garment manufacturer

located and registered as a Subic Bay Freeport
Enterprise under R.A. 7227 and a non-VAT
taxpayer. And as such, it is exempt from payment
of all local and national internal revenue taxes.
During its operations, it purchased various
supplies and materials necessary in the conduct of
its manufacturing business. The supplier of these
goods shifted to Lily s Fashion, Inc. the 10% VAT on
the purchased items amounting to P500,000. Lily s
Fashion Inc. filed with the BIR a claim for refund
for the input tax shifted to it by the suppliers. If
you were the CIR will you allow the refund?

A: No. The exemption of Lily s Fashion Inc. is only

for taxes which it is directly liable, hence, it cannot
claim exemption for tax shifted to it, which is not at
all considered a tax to the buyer but part of the
purchase price. Lily s Fashion Inc. is not a taxpayer
in so far as the passed-on tax is concerned and
therefore, it cannot claim for a refund of a tax
merely, shifted to it. Only taxpayers are allowed to
file a claim for refund. (2006 Bar Question)

Q: What is Tax Cascading?

A: An item is taxed more than once as it makes its

way from production to final retail sale.

Q: Explain how VAT is not a cascading tax?

A: VAT is merely added as part of the purchase

price and not as a tax because the burden is merely
shifted. Thus, there can be no tax on the tax itself.

Q: What are the advantages in imposing VAT?

A:
1.
2.
3.
4.

Economic growth
Simplified tax administration
Promote honesty
Higher governmental revenues

Q: Is the VAT law violative of the administrative

feasibility principle?

A: No. The VAT law is principally aimed to

rationalize the system of taxes on goods and
services. Thus, simplifying tax administration and
making the system more equitable to enable the
country to attain economic recovery. (Kapatiran ng
Mga Naglilingkod sa Pamahalaan v. Tan,
G.R.No.81311, June 30, 1988)

Q: Is VAT regressive?

A: Yes. By its very nature, it is regressive inasmuch

as the VAT paid by the consumer or business for
every goods bought or services enjoyed is the same
regardless of income. In other words, the VAT paid
eats the same portion of an income, whether big or
small.

The VAT taxes you on how much you spend rather

than how much you make. It is usually regressive
because lower income people generally spend a
higher percentage of their income and save less
than higher income people.

Q: How is the regressive effect of VAT minimized?

A: In the case of VAT, the law minimizes the

regressive effects of this imposition by providing for
zero rating of certain transactions while granting
exemptions to other transactions. The transactions
which are subject to VAT are those which involve
goods and services which are used or availed of
mainly by higher income groups. (Ibid.)

Characteristics of VAT

Q: What are the characteristics of VAT?

A:
1. It is an indirect tax where tax shifting is
always presumed
2. It is consumption-based
3. It is imposed on the value-added in each
stage of distribution
4. It is a credit-invoice method value-added
tax
5. It is not a cascading tax. (1996 Bar
Question)

Impact of Tax

Q: Who bears the impact of tax (VAT)?

A: It is on the seller upon whom the tax has been

imposed.

Incidence of Tax

Q: Who bears the incidence of tax (VAT)?

A: It is on the final consumer, the place at which the

tax comes to rest. The tax is shifted to the buyer of
the goods, properties, or services.

Tax Credit Method

Q: Explain the Tax Credit Method (also called

invoice method ) of collecting VAT?

A: The input tax shifted by the seller to the buyer is

credited against the buyer s output taxes when he
in turn sells the taxable goods, properties or
services.

Q: What is the Destination Principle or the

Cross Border Doctrine as used in VAT?

A: Under this doctrine, goods and services are taxed

only in the country where they are consumed. No
VAT shall be imposed to form part of the cost of
goods destined outside the territorial border of the
taxing authority. Thus, exports are zero-rated, while
imports are taxed.

Actual shipment of the goods from the Philippines

to a foreign country is a precondition of an export
sale following the destination principle being
adhered to by our VAT system.

Q: Is there any exception to the destination

principle?

A: Yes. The law clearly provides for an exception to

the destination principle; that is, for a zero percent
VAT rate for services that are performed in the

Philippines, "paid for in acceptable foreign currency

and accounted for in accordance with the rules and
regulations of the BSP."

Hence, actual or constructive export of goods and

services from the Philippines to a foreign country
must be zero-rated for VAT; while, those destined
for use or consumption within the Philippines shall
be imposed the twelve percent (12%) VAT.

PERSONS LIABLE FOR VAT

Q: Who are liable to pay VAT?

A: Any person who in the course of trade or

business:
1. Sells, barters, exchanges, leases goods or
properties;
2. Renders services; and
3. Imports goods shall be subject to VAT
imposed in Sections 106 to 108 of the
NIRC. (Sec. 4.105-1, RR 16-2005)

Consequently, any sale, barter or exchange of

goods or services not in the course of trade or
business is not subject to VAT. (Commissioner v.
Magsaysay Lines Inc., G.R. No. 146984, July 28,
2006)

Q: Define in the course of trade or business

(Rule of Regularity) as used under the VAT law.

A: It means the regular conduct or pursuit of a

commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, non-profit private
organization (irrespective of the disposition of its

net income and whether or not it sells exclusively to

members or their guests), or government entity.

GR: If the disposition of goods or services is not in

the course of trade or business then it is not subject
to VAT

XPN: Importation is subject to VAT regardless of

whether or not it is in the course of trade or
business.

Reason: This is to protect our local or domestic

goods or articles and to regulate the entry or
introduction of foreign articles to our local market.

Q: Pursuant to the privatization program of the

government, National Development Company
(NDC) sold five of its vessels to Magsaysay Lines
Inc. (Magsaysay). In the sales contract it provides
that VAT shall be paid by the purchaser Magsaysay
Lines. Magsaysay asked BIR for a formal request
for a ruling whether said purchaser should pay
VAT on account of such sale. BIR held that it is
liable to pay VAT. The CTA reversed the same on
the ground that it was not done in the ordinary
course of business of NDC.

Is Magsaysay lines liable to pay VAT on such sale?

A: No. VAT is a tax levied only on the sale, barter or

exchange of goods or services by persons who
engage in such activities, in the course of trade or
business. The "carrying on business" does not mean
the performance of a single disconnected act, but
means conducting, prosecuting and continuing
business by performing progressively all the acts
normally incident thereof; while "doing business"
conveys the idea of business being done, not from
time to time, but all the time. "Course of business"
is what is usually done in the management of trade
or business.

The act of NDC in selling the vessels was not done in

the regular manner, not in the ordinary course of
trade or business. In fact the sale was effected only

because of the privatization program of the

government thus the sale was not subject to VAT.
(CIR v. Magsaysay Lines Inc., G.R. No. 146984, July
28, 2006)

Q: What are the exemptions to the rule of

regularity?

A:
1. Any business where the gross sales or
receipts or do not exceed P100,000 during
the 12-month period shall be considered
principally for subsistence or livelihood
and not in the course of trade or business.
2. Services rendered in the Philippines by
non-resident foreign persons shall be
considered as being rendered in the
course of trade or business. (Section
105,NIRC)

Q: When is a non-resident, deemed performing

service in the Philippines?
A: Non-resident persons who perform services in
the Philippines are deemed to be making sales in
the course of trade or business, even if the
performance of services is not regular. (Sec 4.105-3,
RR 16-2005).

Q: Who are taxable persons?

A: Taxable persons refer to any person liable for the

payment of VAT, whether registered or registrable
in accordance with Sec. 236 of the Tax Code.

Q: Who is a VAT-registered person?

A: A VAT-registered person refers to any person

who is registered as a VAT taxpayer under Sec. 236
of the Tax code or a person who opted to be
registered as VAT taxpayer. His status as a VAT
registered person shall continue until the
cancellation of the registration.

Q: Who are the persons required to register for

VAT?

A: Every person who in the course of trade of

business, sells, barter, or exchanges goods or
properties, or engages in the sale or exchange of
goods, services subject to VAT if:
1. The Gross sale or gross receipts have
exceeded 1.5 million; or
2. There are reasonable grounds to believe
that his gross receipts or gross sales in the
next 12 month shall exceed 1.5 million.
(Section 236(G), NIRC)

Q: What is the penalty for failure to register as

VAT taxpayer?

A: He shall be held liable to pay the tax as if he is a

VAT registered person but he cannot avail of the
input tax credit for the period that he has not
properly registered. (Section 236(G), NIRC)

Q: Who is a VAT-exempt person?

A: A person who is not liable to pay VAT. He either:

1. Engages only on VAT-exempt transactions
under Section 109(1) (A to U) of NIRC,

regardless of their annual gross sales (but

in sale of residential real property or lease
of residential property, the specific
threshold set by law should not be
exceeded). He is exempted from VAT and
Percentage tax under Section 116 of NIRC.

Note: Real estate seller of residential house and lot

valued at P2.5M or less shall NOT pay VAT nether
percentage tax (Sec. 109(1)(P), NIRC); or

2. Engages in transactions liable to VAT but

becomes exempted from VAT because his
annual gross sales do not exceed P1.5M
(Sec 109(1)(V), NIRC). Though VAT
exempt, he shall pay percentage tax
under Section 116.

Note: A residential unit lessor with a monthly rental

exceeding P10,000 (specific threshold) but whose
annual gross rentals do not exceed P1.5M (general
threshold) shall NOT pay VAT but shall pay percentage
tax (Sec 109(1)(Q), NIRC).

He should register as a VAT-exempt person unless he

opts to register as VAT under Section 109(2) of NIRC.

VAT ON SALE OF GOODS OR PROPERTIES

Requisites of taxability of sale of goods or

properties

Q: What are the requisites for taxability of sale of

goods and personal properties?

A:
1. There is an actual or deemed sale, barter
or exchange of goods or personal

properties for valuable consideration;

2. The sale is in the course of trade or
business or exercise of profession in the
Philippines;
3. The goods or proerties are located in the
Philippines and are for use or
consumption therein; and
4. The sale is not exempt from VAT under
Section 109 of NIRC, special law,
international agreement binding upon the
government of the Philippines.

Note: Absence of any of the above requisites EXEMPTS

the transaction from VAT. However, percentage taxes
may apply (Section 116, NIRC).

Q: What are the requisites for taxability of sale or

exchange of real property?

A:
1. The seller executes a deed of sale,
including dacion en pago, barter or
exchange, assignment, transfer, or
conveyance, or merely contract to sell
involving real property
2. The real property is located within the
Philippines;
3. The seller or transferor is a real estate
dealer
4. The real property is an ordinary asset held
primarily for sale or for lease in the
ordinary course of business
5. The sale is not exempt from VAT under
Section 109 of NIRC, special law, or
international agreement binding upon the
government of the Philippines
6. The threshold amount set by law should
be met.

Note: Absence of any of the above requisites EXEMPTS

the transaction from VAT. However, percentage taxes
may apply under Section 116 of NIRC.

Q: What are the goods or properties which are

subject to VAT?

A: The term goods or properties shall mean all

tangible and intangible objects which are capable of
pecuniary estimation and shall include:

1. Real properties held primarily for sale to

customers or held for lease in the
ordinary course of trade or business
2. The right or the privilege to use patent,
copyright, design or model, plan secret
formula or process, goodwill, trademark,
trade brand or other like property or right
3. The right or the privilege to use in the
Philippines of any industrial, commercial
or scientific equipment
4. The right or the privilege to use motion
picture films, films, tapes and discs
5. Radio, television, satellite transmission
and cable television time
(Sec. 106[A][1], NIRC)

Q: Are all intangible properties subject to VAT?

A: No, only those capable of pecuniary estimation.

(Sec. 4.106-2, RR 16-2005)

Q: Is the sale of real properties subject to VAT?

A: Sale of real properties primarily for sale to

customers or held for lease in the ordinary course
of trade or business of the seller shall be subject to
VAT. (1st par., Sec. 4.16-3, RR 16-2005)

As such, capital transactions of individuals are not

subject to VAT. Only real estate dealers are subject
to VAT.

Q: What are taxable sales?

A: Taxable sales refers to the sale, barter, exchange

and/or lease of goods or properties, including
transactions deemed sale and the performance of
service for consideration, whether in cash or in
kind.

Q: What is gross selling price?

A: It means the total amount of money or its

equivalent which the purchaser pays or is obligated
to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties,
excluding the VAT. The excise tax, if any, on such
goods or properties shall form part of the gross
selling price. (Ibid.)

Q: What are the allowable deductions from the

gross selling price?

A:
1. Discounts determined and granted at the
time of the sale
2. Sales returns and allowances for which
proper credit or refund was made during
the month or quarter to the buyer for
sales previously recorded as taxable sales.

Q: When is the sale of real property subject to

VAT?

A:
1. Residential lot with gross selling price

exceeding P1.5 million;

2. Residential house and lot or other
residential dwellings with gross selling
price exceeding P2.5 million.

Note: Whether the instrument is denominated as a

deed of absolute sale, deed of conditional sale or
otherwise.

Q: What is gross selling price (in case of sale or

exchange of real property)?

A: It is the consideration stated in the sales

document or the fair market value whichever is
higher. If the VAT is not billed separately in the
document of sale, the selling price or the
consideration stated therein shall be deemed to be
inclusive of VAT.

Q: Define initial payments.

A: Payment/s which the seller receives before or

upon execution of the instrument of sale and
payments which he expects or is scheduled to
receive in cash or property (other than evidence of
indebtedness of the purchaser) during the year
when the sale or disposition of real property was
made.

Q: What are the distinctions between sale on

installment plan and sale on a deferred payment
basis?

A:
Installment Plan
Deferred Plan
Initial payments do not
exceed 25% of the gross
selling price
Initial payments exceed
25% of the gross selling

price
Seller shall be subject to
output VAT on the
installment payments
received, including the
interests and penalties for
late payment, actually
and/or constructively
received.
Transaction shall be
treated as cash sale which
makes the entire selling
price taxable in the month
of sale.
The buyer of the property
can claim the input tax in
the same period as the
seller recognized the output
tax.
Output tax shall be
recognized by the seller
and input tax shall accrue
to the buyer at the time of
the execution of the
instrument of sale.
Payments that are
subsequent to initial
payments shall be subject
to output VAT
Payments that are
subsequent to initial
payments shall no longer
be subject to output VAT

ZERO-RATED SALES OF GOODS OR PROPERTIES,

AND EFFECTIVELY ZERO-RATED SALES OF GOODS
OR PROPERTIES

Q: What is the meaning of zero-rated transaction?

A: The gross selling price of goods or properties is

multiplied by 0% VAT rate. Zero-rated sale of goods
or properties by a VAT-registered person is a
taxable transaction for VAT purposes but the sale

does not result in any output tax.

However, the input tax on the purchases of goods,

properties or services related to such zero-rated
sale shall be available as tax credit or refund.

Q: What is the difference between

and VAT-exempt transactions?

zero-rated

A. The difference lies in the input tax. In VATexempt transactions there is no input tax credit
allowed. In the case of 0% rated transaction of a

VAT registered person, the sale of goods or

properties is multiplied by 0% thus his output tax is
P 0.00. Since the person is VAT-registered, he can
claim input tax for purchases made from VATregistered entities.

E.g.: Output tax -------------------- P 0.00

Less: Input tax ------------------- 5,000.00
VAT Creditable P 5, 000.00

EXEMPT
ZERO-RATED
Nature of transaction
Not taxable; removes VAT
at the exempt stage
Transaction is taxable for
VAT purposes although the
tax levied is 0%
By whom made
Need not be a VATregistered person
Made by a VAT-registered
person
Tax Credit/Refund
Cannot avail of tax credit
or refund. Thus, may
result in increased prices
(Partial Relief)
Can claim or enjoy tax
credit/refund
(Total Relief)

Q: What are the zero-rated sales of goods by a

VAT-registered person?

A:
1. Export sales
2. Foreign currency denominated sale
3. Sales to persons or entities whose
exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects such sales to zero rate. (Sec. 106,
NIRC)

Q: What is meant by export sales?

A: The term export sales means:

1. The sale and actual shipment of goods
from the Philippines to a foreign country:
a. irrespective of any shipping
arrangement;
b. paid for in acceptable foreign
currency or its equivalent in goods
or services;
c. accounted for in accordance with
the rules and regulations of BSP.

2. Sale of raw materials or packaging

materials by a VAT-registered entity to a
non-resident buyer:
a. for delivery to a non resident
local export-oriented
enterprise;
b. used in the manufacturing,
processing, packing, repacking
in the Philippines of the said
buyer s goods;
c. paid for in acceptable foreign
currency;
d. accounted in accordance with
the rules of BSP.

3. Sale of raw material or packaging

materials to export oriented enterprise
whose export sales exceed 70% of total
annual production

4. Sale of gold to BSP

5. Those considered as export sales under

the E.O. 226 (Omnibus Investment Code
of 1987)

6. The sale of goods, supplies, equipment

and fuel to persons engaged in
international shipping or international air
transport operations. (Sec. 106[A][2][a],
NIRC as amended by RA 9337)

Note: Under Omnibus Investment Code:

i. The Philippine port F.O.B. value determined from
invoices, bills of lading, inward letters of credit, landing
certificates, and other commercial documents, of
export products exported directly by a registered
export producer, or

ii. The net selling price of export products sold by a

registered export producer to another export
producer, or to an export trader that subsequently
export the same;

iii. Provided, that sales of export products to another

producer or to an export trader shall only be deemed
expoert sales when actually exported by the latter, as
evidenced by landing certificates or similar commercial
documents

Q: When is export sale exempt and when is it zerorated?

A: Export sale is exempt if made by a non-VAT

person (Sec. 109, NIRC). On the other hand, it is
zero-rated if made by VAT-registered person (Sec.
4.106-5, RR 16-2005).

Q: Is the sale of goods to ecozone, such as PEZA,

considered as export sale?

A: Yes. Notably, while an ecozone is geographically

within the Philippines, it is deemed a separate
customs territory and is regarded in law as foreign
soil. Sales by suppliers from outside the borders of
the ecozone to this separate customs territory are
deemed as exports and treated as export sales.

These sales are zero-rated or subject to a tax rate of

zero percent. (CIR v. Sekisui Jushi Philippines, Inc.,
G.R. No. 149671, July 21, 2006)

Q: What is an ecozone?

A: An ecozone or a Special Economic Zone has been

described as
selected areas with highly
developed or which have the potential to be
developed into agro-industrial, industrial, tourist,
recreational, commercial, banking, investment and
financial centers whose metes and bounds are fixed
or delimited by Presidential Proclamations. An
ecozone may contain any or all of the following:
industrial estates (IEs), export processing zones
(EPZs), free trade zones and tourist/recreational
centers. The national territory of the Philippines
outside of the proclaimed borders of the ecozone
shall be referred to as the Customs Territory. (CIR v.
Toshiba Information Equipment (Phils.), Inc., G.R..
No. 150154, August 9, 2005)

Q: What are constructive exports?

A:
1. Sales to bonded manufacturing
warehouses of export-oriented
manufacturers
2. Sales to export processing zones
3. Sales to enterprises duly registered and
accredited with the Subic Bay
Metropolitan Authority pursuant to RA
7227
4. Sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products under
guidelines to be set by the Board in
consultation with the Bureau of Internal
Revenue (BIR) and the Bureau of Customs
(BOC)
5. Sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembled or repacked products whether
paid for in foreign currency or not.

Q: What is the rationale for zero-rating exports

sale?

A: It is because the Philippine VAT system adheres

to the cross border doctrine, according to which, no
VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the
territorial border of the taxing authority. (Ibid.)

Note:
For purposes of zeo-rating, export sales of registered
export traders shall include commission income.

Exportation of goods on consignment shall not be

deemed export sales until the export products
consigned are in facet sold the consignee.

Provided, finally, that sales of goods, properties or

services made by a VAT-registered supplier to a BOIregistered manufacturer/producer whose products are
100% exported are considered export sales

A certification to this effect must be issued by the

Board of Investment (BOI) which shall be good for one
year unless subsequently re-issued by the BOI.

Q: What is a Foreign Currency Denominated sale?

A: The phrase 'foreign currency denominated sale'

means sale to a nonresident of goods, except those
mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a
resident in the Philippines, paid for in acceptable
foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP). (Sec. 106[A][2][b], NIRC)

Note: Section 149 refers to excise tax on automobiles.

Section 150 refers to excise tax on non-essential
goods.

Q: Differentiate effectively zero-rated transaction

from automatic zero-rated transaction.

A:
EFFECTIVELY
ZERO-RATED
TRANSACTION
AUTOMATIC
ZERO-RATED
TRANSACTION
Nature
Refers to the sale of
goods, properties or
services by a VATregistered person to a
person, or entity who was
granted indirect tax
exemption under special
laws or international
agreements.
Refers to taxable
transaction for VAT
purposes, but shall not
result in any output tax.
However, the input tax on
purchases of goods,
properties or services
related to such zero-rated
sale, shall be available as
tax credit or refund.
Need to apply for zero-rating
An application for zerorating must be filed and
the BIR approval is
necessary before the
transaction may be
considered effectively
zero-rated.
Need not file an application
form and to secure BIR
approval before sale.
For whose benefit is it intended
Primarily intended to be
enjoyed by the seller who
is directly and legally
liable for the VAT, making

such seller internationally

competitive by allowing
Intended to benefit the
purchaser who, not being
directly and legally liable
for the payment of the
VAT, will ultimately bear
the burden of the tax

the refund or credit of

input taxes that are
attributable to export
sales.
shifted by the suppliers.
Effect
Results in no tax chargeable against the purchaser.
The seller can claim a refund or a tax credit certificate for
the VAT previously charged by suppliers.

Note: For zero-rated transactions, whether automatic

or effectively zero-rated, the word ZERO-RATED
must be prominently stamped on the face of the VAT
invoice or receipt issued by the seller (failure to
comply will make the transaction VAT taxable).

Q: Cebu Toyo Corp., an export enterprise, is a

subsidiary of a foreign corporation duly registered
with the Philippine Economic Zone Authority
pursuant to PD 66 and is also registered with the
BIR as a VAT taxpayer. It sells 80% of its products
to its mother corporation, and the rest are sold to
various enterprises doing business in the Mactan
Export Processing Zone. Inasmuch as both sales
are considered export sales subject to VAT at 0%
rate under the National Internal Revenue Code, as
amended, it filed an application for tax
credit/refund of VAT paid for the said period
representing excess VAT input payments. The CIR
belies the claim for refund.

Is the grant of a refund representing unutilized

input VAT to Cebu Toyo proper?

A: Yes. Cebu Toyo is engaged in taxable rather than

exempt transactions. Taxable transactions are those
transactions which are subject to value-added tax
either at the rate of ten percent (10%) or zero
percent (0%). In taxable transactions, the seller
shall be entitled to tax credit for the value-added
tax paid on purchases and leases of goods,
properties or services. An exemption means that
the sale of goods, properties or services and the use
or lease of properties is not subject to VAT (output
tax) and the seller is not allowed any tax credit on

VAT (input tax) previously paid. A VAT-registered

purchaser of goods, properties or services that are
VAT exempt, is not entitled to any input tax on such
purchases despite the issuance of a VAT invoice or
receipt. Under the system, a zero rated sale by a
VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any
output tax, but the input tax on his purchase of
goods, properties or services related to such zerorated sale shall be available as tax credit or refund
(CIR v. Cebu Toyo Corporation, G.R. No. 149073,
Feb. 16, 2005).

Q: SEAGATE is a resident foreign corporation duly

registered with the SEC to do business in the
Philippines. It is also registered with the PEZA to
engage in the manufacture of recording
components primarily used in computers for
export. SEAGATE is a VAT-registered entity. An
administrative claim for refund of VAT input taxes
in the amount of P28, 369,226.38 with supporting
documents was filed with Revenue District Office
in Cebu. The administrative claim for refund was
not acted upon by the petitioner prompting the
respondent to elevate the case to the CTA. The CIR
contended that since taxes are presumed to have
been collected in accordance with laws and
regulations, Seagate has the burden of proof that
the taxes sought to be refunded were erroneously
or illegally collected. Unfortunately, Seagate failed
to do so.

Is Seagate entitled to the refund or issuance of Tax

Credit Certificate representing alleged unutilized
input VAT paid on capital goods purchased?

A: Yes. No doubt, as a PEZA-registered enterprise

within a special economic zone, it is entitled to the
fiscal incentives and benefits provided for in either
PD 66 or EO 226 which would not subject
respondent to internal revenue laws and
regulations for raw materials, supplies, articles, etc
or would be entitled to income tax holiday;
additional deduction for labor expense, etc. It shall,
moreover, enjoy all privileges, benefits, advantages
or exemptions under both Republic Act Nos. 7227
(duty-free importation) and 7844 (tax credits).
Thus, Seagate enjoys preferential tax treatment.
The VAT on capital goods is an internal revenue tax
from which the entity is exempt. Although the
transactions involving such tax are not exempt,
Seagate as a VAT-registered person, however, is
entitled to their credits.

Since the purchases of Seagate are not exempt

from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916
effectively subjects such transactions to a zero rate,
because the ecozone within which it is registered is
managed and operated by the PEZA as a separate
customs territory. This means that in such zone is
created the legal fiction of foreign territory. Under
the cross-border principle of the VAT system being
enforced by the BIR, no VAT shall be imposed to
form part of the cost of goods destined for
consumption outside of the territorial border of the
taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of
the VAT, then the same rule holds for such exports
from the national territory -- except specifically
declared areas -- to an ecozone. (CIR v. Seagate
Technology (Philippines), G.R. No. 153866, Feb. 11,
2005)

Transactions Deemed Sale

Q: What are the transactions deemed sale and

therefore subject to VAT?

A:
1. Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in
the course of business (i.e., when a VATregistered person withdraws goods from
his business for his personal use);

2. Distribution or transfer to:

a. Shareholders or investors as share in
the profits of the VAT-registered
persons; or
b. Creditors in payment of debt;

Requisites:
a. The VAT-registered person distributing or
paying is a domestic corporation;
b. What is being declared or paid is either
real property owned by the company or
shares of stocks owned in another
company; and
c. The domestic corporation is either a real
estate dealer (in case of real property) or
dealer in securities (in case of shares of
stock)

Note: Only real estate dealers and dealer in

securities are liable for payment of VAT in
case of sale, barter, or exchange of real
property or share of stocks under Sections
106 and 108, respectively.

3. Consignment of goods if actual sale is not

made within sixty (60) days following the
date such goods were consigned.

XPN: if the consigned goods were

physically returned by the consignee
within the 60-day period;

4. Retirement from or cessation of business,

with respect to inventories of taxable
goods existing as of such retirement or
cessation. (Sec. 106[B], NIRC)

Note: The transactions are deemed sale because in

reality there is no sale, but still the law provides that
the following transactions are considered as sale and
are thus subject to VAT.

Q: What transactions considered retirement or

cessation of business deemed sale subject to
VAT?

A:
1. Change of ownership of the business.
There is change in the ownership of the
business when a single proprietorship
incorporates; or the proprietor of a single
proprietorship sells
his entire business.

2. Dissolution of a partnership and creation

of a new partnership which takes over the
business. (Sec. 4.106-7, RR 16-2005)

Q: What is necessary to consider in determining

whether a transaction is deemed sale ?

A: Before considering whether the transaction is

deemed sale , it must first be determined whether
the sale was in the ordinary course of trade or
business. Even if the transaction was deemed sale
if it was not done in the ordinary course of trade or
business still the transaction is not subject to VAT.

(CIR v. Magsaysay Lines Inc., G.R. No. 146984, July

28, 2006)

Q: What is the tax base of transactions deemed

sale?

A: The output tax shall be based on the market

value of the goods deemed sold as of the time of
the occurrence of the transactions enumerated
above in numbers 1, 2 and 3. However, in the case
of retirement or cessation of business, the tax base
shall be the acquisition cost or the current market
price of the goods or properties, whichever is
lower.
In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base.

Change or Cessation of Status as VAT-Registered

Person

Q: When is a change in or cessation of status of a

VAT registered person subject to VAT?

A: The following are subject to 12% output VAT:

1. Change of business activity from VAT

taxable status to VAT-exempt status

2. Approval of a request for cancellation of

registration due to reversion to exempt
status

3. Approval of a request for cancellation of

registration due to a desire to revert to
exempt status after the lapse of 3

consecutive years from the time of

registration by a person who voluntarily
registered despite being exempt under
Sec 109 (2) of the Tax Code

4. Approval of a request for cancellation of

registration of one who commenced
business with the expectation of gross
sales or receipt exceeding P1,500,000 but
who failed to exceed this amount during
the first 12 months of operations.

Q: When is a change in or cessation of status of a

VAT registered person not subject to VAT?

A: The following are not subject to 12% output vat

1. Change of control in the corporation of as

corporation by the acquisition of
controlling interest of the corporation by
another stockholder or group of
stockholders .

The goods or properties used in the

business or those comprising the stock-intrade of the corporation will not be
considered sold, bartered or exchanged
despite the change in the ownership
interest. However, exchange of property
by corporation acquiring control for the
shares of stocks of the target corporation
is subject to VAT.

2. Change in the trade or corporate name of

the business.

3. Merger or consolidation of corporations.

The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed by the
surviving or new corporation.

VAT on Importation of Goods

Q: Is importation subject to VAT?

A: Yes. VAT shall be assessed and collected upon

goods brought into the Philippines whether for use
in business or not.

Q: What is the tax base of importation?

A:
GR: The tax base shall be based on the total
value used by the BOC in determining tariff and
customs duties plus customs duties, excise taxes,
if any, and other charges to be paid by the
importer prior to the release of such goods from
customs custody. (Sec.107[A])

XPN: Where the customs duties are determined

on the basis of quantity or volume f the goods,
the VAT shall be based on the landed cost plus
excise taxes, if any.

Q: Who pays for the tax on imported goods?

A: The importer shall pay the tax prior to the

release of the imported goods.

Q: Who is an importer?

A: An importer is a person who brings goods into

the Philippines, whether or not made in the course
of trade or business. It includes non-exempt
persons or entities who acquire tax free imported
goods from exempt persons, entities or agencies.

Q: When does importation begin and end?

A: Importation begins when a vessel or aircraft

enters the Philippine jurisdiction with the intention
to unload goods/cargo. Importation ends upon the
payment of duties, taxes, and other charges due
upon the article, or to be paid at the port of entry
and legal permit for withdrawal shall have been
granted.

Q: What is

technical importation ?

A: Sale of goods by a PEZA registered enterprise to

a buyer from the customs territory shall be treated
as a technical importation. Such buyer shall be
treated as an importer thereof and shall be
imposed with the corresponding import taxes.

Transfer of Goods by Tax Exempt Persons

Q: What is the consequence if a tax exempt person

would transfer imported goods to a non-exempt
person?

A: The purchaser or transferee shall be considered

as an importer and shall be held liable for VAT and
other internal revenue tax due on such importation.
(Sec. 107[B])

Note: The tax due on such importation shall constitute

a lien on the goods superior to all charges or liens on
the goods, irrespective of the possessor thereof.

Q: Anshari, an alien employee of Asian

Development Bank (ADB) who is retiring soon has
offered to sell his car to you, which he imported
tax-free for his personal use. The privilege of

exemption from tax is recognized by tax

authorities. If you decide to purchase the car, is
the sale subject to tax? Explain.

A: Yes. The sale is subject to tax. Sec. 107 (B) of the

Tax Code provides that In case of tax-free
importation of goods into the Philippines by
persons, entities or agencies exempt from tax,
where the goods are subsequently, sold,
transferred or exchanged in the Philippines to nonexempt persons or entities, the purchasers,
transferees or recipients shall be considered a the
importer thereof, who shall be liable for any
internal revenue tax on such importation. (2005 Bar
Question)

VAT on Sale of Service and Use or Lease of

Properties

Q: What is meant by
subject to VAT?

sale or exchange of services

A: It means the performance of all kinds of services

in the Philippines for others for a fee, remuneration
or consideration.

Q: What does the phrase sale or exchange of

services likewise include?

A:
1. The lease or the use of or the right or
privilege to use any copyright, patent,
design or model plan, secret formula or
process, goodwill, trademark, trade brand
or other like property or right

2. The lease or the use of, or the right to use

of any industrial, commercial or, scientific
equipment
3. The supply of scientific, technical,
industrial or commercial knowledge or
information
4. The supply of any assistance that is
ancillary and subsidiary to and is
furnished as a means of enabling the
application or enjoyment of any such
property, or right as is mentioned in
subparagraph (2) or any such knowledge
or information as is mentioned in
subparagraph (3)
5. The supply of services by a non-resident
person or his employee in connection
with the use of property or rights
belonging to, or the installation or
operation of any brand, machinery or
other apparatus purchased from such
nonresident person
6. The supply of technical advice, assistance
or services rendered in connection with
technical management or administration
of any scientific, industrial or commercial
undertaking, venture, project or scheme
7. The lease of motion picture films, films,
tapes and discs
8. The lease or the use of or the right to use
radio, television, satellite transmission
and cable television time. (Ibid.)

Note: Lease of properties shall be subject to the tax

herein imposed irrespective of the place where the
contract of lease or licensing agreement was executed
if the property is leased or used in the Philippines.

Q: What is meant by

service ?

A: Service has been defined as the art of doing

something useful for a person or company for a
fee or useful labor or work rendered or to be
rendered another for a fee. (CIR v. American
Express International, Inc., G. R. No. 152609, June
29, 2005)

Q: What are the categories of Services:

A:
1.
2.
3.
4.

Professional/ technical consultancy

Transfer of technology
Lease or use of intangible property
Lease or use of tangible property

Note: Non-life insurance policies are subject to VAT

while life insurance policies are VAT exempt but
subject to 5% premium tax under Section 123 of NIRC.

Q: Are non-stock, non-profit entities liable to pay

VAT for sale of goods and services?

A: Yes. As long as the entity provides service for a

fee, remuneration or consideration, then the
service rendered is subject to VAT. (Commissioner v.
CA, G.R. No. 125355, Mar. 30, 2000)

Q: What is the tax rate?

A: 12% of the gross receipts derived from the sale

or exchange of service, including the use or lease of
properties. (Section 108, NIRC)

Q: What is the meaning of gross receipts?

A: It pertains to the total amount of money or its

equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively

received during the taxable quarter for the services

performed or to be performed for another person,
excluding VAT. (Sec. 108, NIRC)

Q: What is the meaning of constructive receipt?

A: Constructive receipt occurs when the money

consideration or its equivalent is placed at the
control of the person who rendered the service
without restrictions by the payor.

Q: Is a lease of property subject to VAT?

A: All forms of property for lease, whether real or

personal, are liable to VAT.

Q: Are advance payments made by lessee for lease

of property subject to VAT?

A: If the advance payment is for the faithful

performance of certain obligations of the lessee, it
is not subject to VAT. A security deposit that is
applied to rental shall be subject to VAT at the time
of its application. If the advance payment
constitutes a pre-paid rental, then such payment is
taxable to the lessor in the month when received,
irrespective of the accounting method employed by
the lessor.

Q: PHILHEALTH, a corporation that establishes,

maintains, conducts and operates a prepaid group
practice health care delivery system or a health
maintenance organization to take care of the sick
and disabled persons enrolled in the health care
plan, inquired before the Commissioner of
Internal Revenue (Commissioner) whether the
services it provided to the participants in its health
care program were exempt from the payment
of VAT. The Commissioner issued VAT Ruling 23188 stating that PHILHEALTH, as a provider of
medical services, was exempt from the VAT
coverage.

Meanwhile, Republic Act 7716 (E-VAT Law)

took effect, amending further the NIRC of 1977.
Subsequently, R.A. 8424 (NIRC of 1997) took
effect, substantially adopting and reproducing the
provisions of E.O. 273 on VAT and the E-VAT law.
With the passage of these laws, the BIR sent
PHILHEALTH a Preliminary Assessment Notice for
deficiency in its payment of the VAT and
documentary stamp taxes (DST) for taxable years
1996 and 1997 and a letter demanding payment of
deficiency VAT and DST for taxable years 1996 to
1997.

PHILHEALTH filed a protest with the Commissioner

but the latter did not take action on its protest.
Consequently, PHILHEALTH brought the matter to
the CTA. The CTA declared that VAT Ruling 231-88
is void and without force and effect and
ordered it to pay the VAT deficiency, but
canceling the payment of DST. After a Motion for
Partial Reconsideration, CTA overruled its decision
with respect to the payment of deficiency VAT and
held that PHILHEALTH was entitled to the benefit
of non-retroactivity of rulings guaranteed under
Section 246 of the Tax Code, in the absence of
showing of bad faith on its part.

Are the services of PHILHEALTH subject to VAT?

A: Yes. PHILHEALTH s services are not VAT-exempt.

Those exempted from VAT are those engaged in the
performance of medical, dental, hospital and
veterinary services except those rendered by
professionals. PHILHEALTH is not actually
rendering medical service but merely acting as a
conduit between the members and their accredited
and recognized hospitals and clinics. It merely
provides and arranges for the provision of pre-need
health care services to its members for a fixed
prepaid fee for a specified period of time; that it
then contracts the services of physicians, medical
and dental practitioners, clinics and hospitals to
perform such services to its enrolled members; and
that it enters into contract with clinics, hospitals,
medical professionals and then negotiates with
them regarding payment schemes, financing and
other procedures in the delivery of health
services. (CIR v. Philippine Health Care Providers
Inc., G.R. No. 168129, Apr. 24, 2007)

Q: Are gross receipts derived from sales of

admission tickets in showing motion pictures

subject to VAT?

A: No. The legislative intent is not to impose VAT on

persons already covered by the amusement tax.
The repeal by the Local Government Code of 1991
of the Local Tax Code transferring the power to
impose amusement tax on cinema/theater
operators or proprietors to the local government
did not grant nor restore the said power to the
national government nor did it expand the coverage
of VAT. Since the imposition of a tax is a burden on
the taxpayer, it cannot be presumed nor can it be
extended by implication. As it is, the power to
impose amusement tax on cinema/theater
operators or proprietors remains with the local
government.

A contrary ruling will subject cinema/theater

operators or proprietors to a total of 40% tax, the
10% VAT being on top of the 30% amusement tax
imposed by the Local Government Code of 1991,

thereby killing the *goose+ that lays the golden

egg*s+. (CIR v. SM Prime Holdings, Inc., G.R. No.
185305, Feb. 26, 2010)

Requisites for Taxability

Q: What are the requisites for the taxability of sale

or exchange of services or lease or use of
property?

A:
1. There is a sale or exchange of service or
lease or use of property enumerated in
the law or other similar services;
2. The service is performed or to be
performed in the Philippines;
3. The service is in the course of trade of
taxpayer s trade or business or
profession;
4. The service is for a valuable consideration
actually or constructively received; and
5. The service is not exempt under the Tax
Code, special law or international
agreement.
Note: Absence of any of the requisites renders the
transaction exempt from VAT but may be subject to
other percentage tax under Title V of the Tax Code.

ZERO-RATED Sale of Service

Q: What are the zero-rated services?

A:
1. Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the
services are paid for in acceptable foreign
currency and accounted for in accordance

with the rules and regulations of the

Bangko Sentral ng Pilipinas (BSP);

2. Services other than those mentioned in

the preceding paragraph rendered to a
person engaged in business conducted
outside the Philippines or to a
nonresident person not engaged in
business who is outside the Philippines
when the services are performed, the
consideration for which is paid for in
acceptable foreign currency and
accounted for in accordance with the
rules and regulations of the BSP;

3. Services rendered to persons or entities

whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to
zero percent (0%) rate;

4. Services rendered to persons engaged in

international shipping or international air
transport operations, including leases of
property for use thereof;

5. Services performed by subcontractors

and/or contractors in processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed
seventy percent (70%) of total annual
production;

6. Transport of passengers and cargo by air

or sea vessels from the Philippines to a

foreign country; and

7. Sale of power or fuel generated through

renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels. (Sec. 108, NIRC as
amended by R.A. 9337)

VAT EXEMPT TRANSACTIONS

Q: What are VAT-exempt transactions?

A: It involves goods or services which, by their

nature, are specifically listed in and expressly
exempted from VAT under the Tax Code, without
regard to the tax status of the party to the
transaction.

Q: Define exemption under the VAT law.

A: An exemption means that the sale of goods,

properties or services and the use or lease of
properties is not subject to VAT (output tax) and
the seller is not allowed any tax credit on VAT
(input tax).

Note: VAT-exempt transactions shall not be included in

determining the general threshold prescribed by law
(P1.5 million annual gross sales)

Q: Who is a VAT-exempt party?

A: It is a person or entity granted VAT exemption

under the Tax Code, a special law or an

international agreement to which the Philippines is

a signatory, and by virtue of which its taxable
transactions become exempt from VAT.

Note: The basis for the grant of VAT exemptions is

equity

Q: What are the distinctions between exempt

transaction and exempt party?

A:
EXEMPT PARTY
EXEMPT TRANSACTION
A person or entity granted
VAT exemption under the
Tax Code, special law or
international agreement to
which RP is a signatory,
and by virtue of which its
taxable transactions
become exempt from the
VAT.
Involves goods or services
which, by their nature are
specifically listed in and
expressly exempted from
the VAT under the Tax
Code, without regard to the
tax status of the parties in
the transactions.
Such party is not subject to
the VAT, but may be
allowed a tax refund or
credit of input tax paid,
depending on its
registration as a VAT or
non-VAT taxpayer.
Transaction is not subject
to VAT, but the seller is not
allowed any tax refund or
credit for any input taxes
paid.

Q: Does a VAT-registered individual have the

option to be subject to VAT rather than to avail of
the above-mentioned exemptions?

A: Yes. Under Sec. 109(2) of the Tax Code, the

taxpayer has the option to be:
1. VAT exempt under Sec. 109(1) of the
NIRC; or
2. Be subject to VAT.

Note: The choice of the taxpayer is irrevocable for a

period of 3 years from the quarter the election was
made.

Q: Why would a VAT-exempt person choose to be

subject to VAT than to be VAT exempt?

A: A VAT-registered person who opted to be subject

to VAT may avail of the input tax credit. The input
tax is deducted from the output tax thereby
reducing his tax liabilities but a VAT-registered
person who opted to be exempt there from cannot
avail of the input tax credit. Thus a VAT-registered
person may choose to be subjected to rather than
exempt from payment of VAT.

Q: Will a VAT-registered purchaser of goods,

properties or services that are VAT-exempt be
entitled to any input tax on such purchase?

A: No.

Q: Are petroleum products exempt from VAT?

A: No longer exempt.

Q: When is the sale of real properties subject to

VAT? When is it exempt?

A: Real properties held primarily for sale to

customers or held for lease in the ordinary course
of trade or business is subject to VAT. (Sec.

106[A][1][a], NIRC)

Whereas, real properties not primarily held for sale

to customers or held for lease in the ordinary
course of trade or business are exempt from VAT.
(Sec. 109, NIRC)

Q: When is fuel exempt from tax, and when is it

zero-rated?

A: Fuel is exempt if imported by persons engaged in

international shipping or air transport operations
(Sec. 109 [T], NIRC). On the other hand, fuel is zerorated when sold to persons engaged in
international shipping or international air transport
operations without docking or stopping at any
other port in the Philippines. (Sec 4.106-5[A][6], RR
16-2005]

Q: State whether the following transactions are: a)

VAT Exempt, b) subject to VAT at 12%; or c)
subject to VAT at 0%.

1. Sale of fresh vegetables by Aling Ining at

the Pamilihang Bayan ng Trece Martirez.
2. Services rendered by Jake's Construction
Company, a contractor to the World
Health Organization in the renovation of
its offices in Manila.
3. Sale of tractors and other agricultural
implements by Bungkal Incorporated to
local farmers. [1%]
4. Sale of RTW by Cely's Boutique, a Filipino
dress designer, in her dress shop and
other outlets.
5. Fees for lodging paid by students to
Bahay-Bahayan Dormitory, a private
entity operating a student dormitory
(monthly fee PI, 500).

A:

1. VAT exempt. Sale of agricultural products,

such as fresh vegetables, in their original
state, of a kind generally used as, or
producing foods for human consumption
is exempt from VAT. (Sec. 109[A], NIRC)
2. VAT at 0%. Since Jake's Construction
Company has rendered services to the
World Health Organization, which is an
entity exempted from taxation under

international agreements to which the

Philippines is a signatory, the supply of
services is subject to zero percent (0%)
rate. (Sec. 108[B][3], NIRC)
3. VAT at 12%. Tractors and other
agricultural implements fall under the
definition of goods which include all
tangible objects which are capable of
pecuniary estimation. (Sec. 106[A][1],
NIRC)
4. This is subject to VAT at 12%. This
transaction also falls under the definition
of goods which include all tangible objects
which are capable of pecuniary
estimation (Sec. 106[A][1], NIRC)
5. VAT Exempt. The monthly fee paid by
each student falls under the lease of
residential units with a monthly rental per
unit not exceeding P10,000, which is
exempt from VAT regardless of the
amount of aggregate rentals received by
the lessor during the year. (Sec. 109[Q],
NIRC). The term unit shall mean per
person in the case of dormitories,
boarding houses and bed spaces (Sec.
4.103-1, RR No. 7-95).(1998 Bar
Question)

Q: What is the tax on persons who are exempt

from VAT?

A: Persons who are exempt from the payment of

VAT and who is not a VAT-registered person shall
pay a tax equivalent to three percent (3%) of his
gross quarterly sales or receipts, except
cooperatives shall not be held liable to pay for
three percent (3%) gross receipts tax.

Exempt transactions, Enumerated

Q: What are the VAT exempt transactions?

A:
1. Sale Of Goods And Property

a. Sale or importation of agricultural and

marine food products in their original
state, livestock and poultry of a kind
generally used as, or yielding or producing
foods for human consumption; and
breeding stock and genetic materials
therefor.

Products classified under this paragraph

shall be considered in their original state
even if they have undergone the simple
processes of preparation or preservation
for the market, such as freezing, drying,
salting, broiling, roasting, smoking or
stripping. Polished and/or husked rice,
corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be
considered in their original state (Sec.
109[A], NIRC]);

Note: Fighting cocks, race horses, zoo

animals and other animals generally
considered as pets are not included in the
term livestock and poultry.

It is not a simple process if it is a physical or

chemical process which would alter the
exterior or inner substance of a product in
such a manner as to prepare it for special
use to which it could not have been put in
its original form or condition; like the
addition of preservatives or anti oxidants.

b. Sale of fertilizers; seeds, seedlings and

fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients,
whether locally produced or imported,
used in the manufacture of finished feeds.
Except specialty feeds for race horses,
fighting cocks, aquarium fish, zoo animals
and other animals generally considered as
pets (Sec. 109[B], NIRC]);

c. Transactions which are exempt under

international agreements to which the
Philippines is a signatory or under special
laws, except those under P.D. No. 529
(Sec. 109[K], NIRC]);

Note: PD 529 is Petroleum Exploration

Concessionaires under the Petroleum Act of
1949

d. Sales by agricultural cooperatives duly

registered with the Cooperative
Development Authority (CDA) to their
members as well as sale of their produce,
whether in its original state or processed
form, to non-members; their importation
of direct farm inputs, machineries and
equipment, including spare parts thereof
to be used directly and exclusively, in the
production and/or processing of their
produce (Sec. 109[L], NIRC]);

Note: Unlike in paragraph A, the sales made

by agricultural cooperatives duly accredited
by CDA may be in original state or processed
form is exempt from VAT.

e. Sales by non-agricultural, non-electric and

non-credit cooperatives duly registered with

the Cooperative Development Authority:

Provided that the share capital contribution
of each member does not exceed Fifteen
thousand pesos (P15, 000.00) and regardless
of the aggregate capital and net surplus
ratably distributed among the members
(Sec. 109[N], NIRC]);

f. Export sales by persons who are not VATregistered (Sec. 109[O], NIRC]);

g. Sale of real properties not primarily held for

sale to customers or held for lease in the
ordinary course of trade or business, or real
property utilized for low-cost and socialized
housing as defined by R.A. No. 7279,
otherwise known as the Urban Development
and Housing Act of 1992, and other related
laws, residential lot valued at One million
five hundred thousand pesos (P1,500,000)
and below, house and lot, and other
residential dwellings valued at Two million
five hundred thousand pesos (P2,500,000)
and below: Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amounts herein stated shall
be adjusted to their present values using the
Consumer Price Index, as published by the
National Statistics Office (NSO) (Sec. 109[P],
NIRC]);

h. Sale of books and any newspaper, magazine,

review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted
principally to the publication of paid
advertisements (Sec. 109[R], NIRC);

i. Sale of passenger or cargo vessels and

aircraft, including engine, equipment and
spare parts thereof for domestic or
international transport operations and
provided that (Sec. 109[S], NIRC);
I. Exemption from VAT on the importation
and local purchase of passenger and/or
cargo vessel shall be limited to those of
one hundred fifty tons (150) and above,
including engine and spare parts of the
said vessels;
II. Vessels to be imported shall comply with

the age limit requirements:

Passenger and/or cargo-vessels15 years old
Tanker-10 years old
High speed passenger craft-5
years old

j. Sale of goods or properties other than the

transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One
million five hundred thousand pesos (P1,
500,000): Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall
be adjusted to its present value using the
Consumer Price Index as published by the
NSO (Sec. 109[V], NIRC);

2. Sale of Services

a. Services subject to percentage tax under

Title V (Sec. 109[E], NIRC);

b. Services by agricultural contract growers

and milling for others of palay into rice,
corn into grits and sugar cane into raw
sugar (Sec. 109[F], NIRC);

c. Medical, dental, hospital and veterinary

services except those rendered by
professionals (Sec. 109[G], NIRC);

Note: Laboratory services are exempted

because it is a hospital service.

The sale of medicines by the pharmacy of a

hospital or a clinic to its in-patients is
considered hospital service hence, VAT
exempt. If the sale of medicine is made to

an out-patient, such sale is subject to VAT

(Mamalateo, Value Added Tax, 2007 ed., pp.
163 and 274)

d. Educational services rendered by private

educational institutions, duly accredited
by the DEPED, CHED, TESDA and those
rendered by government educational
institutions (Sec. 109[H], NIRC);

Note: In this section for private educational

institution to be exempt from VAT they
must be duly accredited by DEPED, CHED
and TESDA on there other hand,
government educational institutions are
exempt without the need of the said
accreditation requirements.

e. Services rendered by individuals pursuant

to an employer-employee relationship
(Sec. 109[I], NIRC);

f. Services rendered by regional or area

headquarters established in the
Philippines by multinational corporations

which act as supervisory, communications

and coordinating centers for their
affiliates, subsidiaries or branches in the
Asia-Pacific Region and do not earn or
derive income from the Philippines (Sec.
109[J], NIRC);
g. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws, except those under P.D. No. 529
(Sec. 109[K], NIRC);

h. Gross receipts from lending activities by

credit or multi-purpose cooperatives duly
registered with the Cooperative
Development Authority (Sec. 109[M],
NIRC);

i. Services of
intermediaries
functions, and
intermediaries

banks, non-bank financial

performing quasi-banking
other non-bank financial
(Sec. 109[U], NIRC); and

j. Performance of services other than the

transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of
One million five hundred thousand pesos
(P1, 500,000): Provided, That not later
than January 31, 2009 and every three (3)
years thereafter, the amount herein
stated shall be adjusted to its present
value using the Consumer Price Index as
published by the NSO (Sec. 109[V], NIRC);

3. Importation
a. Importation of personal and household
effects belonging to the residents of the
Philippines returning from abroad and
nonresident citizens coming to resettle in
the Philippines: Provided, That such goods
are exempt from customs duties under the
Tariff and Customs Code of the Philippines
(Sec. 109[C], NIRC);

b. Importation of professional instruments and

implements, wearing apparel, domestic

animals, and personal household effects

(except any vehicle, vessel, aircraft,
machinery, other goods for use in the
manufacture and merchandise of any kind in
commercial quantity) belonging to persons
coming to settle in the Philippines, for their
own use and not for sale, barter or
exchange, accompanying such persons, or
arriving within ninety (90) days before or
after their arrival, upon the production of
evidence satisfactory to the Commissioner,
that such persons are actually coming to
settle in the Philippines and that the change
of residence is bona fide (Sec. 109[D], NIRC);
c. Importation of books and any newspaper,
magazine, review or bulletin which appears
at regular intervals with fixed prices for
subscription and sale and which is not
devoted principally to the publication of
paid advertisements (Sec. 109[R], NIRC);

d. Importation of passenger or cargo vessels

and aircraft, including engine, equipment
and spare parts thereof for domestic or
international transport operations and
provided that (Sec. 109[S], NIRC);
I. Exemption from VAT on the importation
and local purchase of passenger and/or
cargo vessel shall be limited to those of
one hundred fifty tons (150) and above,
including engine and spare parts of the
said vessels
II. Vessels to be imported shall comply with
the age limit requirements
Passenger and/or cargo-vessels
15 years old;
Tanker-10 years old;
High speed passenger craft-5
years old

e. Importation of fuel, goods and supplies by

persons engaged in international shipping or
air transport operations (Sec. 109[T], NIRC).

4. Lease Of Property

a. Lease of a residential unit with a monthly

rental not exceeding Ten thousand pesos
(P10,000) Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall
be adjusted to its present value using the
Consumer Price Index as published by the
NSO (Sec. 109[Q], NIRC);

b. Lease of passenger or cargo vessels and

aircraft, including engine, equipment and
spare parts thereof for domestic or
international transport operations (Sec.
109[S], NIRC);

c. Lease of goods or properties or the

performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One
million five hundred thousand pesos (P1,
500,000): Provided, That not later than
January 31, 2009 and every three (3) years

thereafter, the amount herein stated shall

be adjusted to its present value using the
Consumer Price Index as published by the
NSO. (Sec. 109[V], NIRC)

Summary of rules:
a. Monthly rental P10,000 or less regardless
of annual gross sales = VAT exempt and
no percentage tax ( VAT-exempt
transactions shall pay no VAT neither 3%
percentage tax under Section 116 of
NIRC)
b. Monthly rental above P10,000 but annual
gross sales do not exceed P1.5M = VATexempt but shall pay 3% percentage tax
under Section 116 of NIRC.
c. Monthly rental above P10,000 and annual
gross sales exceed P1.5M = there shall be
VAT.

Note: The foregoing enumerations are taken from Sec.

109 of theNIRC as amended by RA 9337. There are 22
exemptions under the law but in this enumeration the
said exemptions are classified into sale of goods, sale
of services, importation and lease of property. Thus,
there are some repetitions in the enumeration as they
were classified into four categories.

INPUT TAX AND OUTPUT TAX, DEFINED

Q: Define Input Tax.

A: It means the value-added tax due from or paid

by a VAT-registered person in the course of his
trade or business on importation of goods or local
purchase of goods or services, including lease or
use of property, from a VAT-registered person. It
shall also include the transitional input tax
determined in accordance with Section 111 of the
NIRC. (Sec.110 [A][3], NIRC)

Q: Is input tax a property right within the

Constitutional purview of the due process clause?

A: No. A VAT-registered person s entitlement to the

creditable input tax is a mere statutory privilege
which may be limited or removed by law.

Q: Define Output Tax.

A: It means the value-added tax due on the sale or

lease of taxable goods or properties or services by
any person registered or required to register under
Sec. 236 of the NIRC. (Sec. 110[A][3], NIRC)

Sources of Input Tax

Q: What are creditable input taxes?

A: The input tax evidenced by a VAT invoice or

official receipt issued in accordance with Section
113 of the NIRC on the following transactions shall
be creditable against the output tax:
1. Purchase or importation of goods:
a. For sale; or
b. For conversion into or intended to
form part of a finished product for
sale including packaging materials; or
c. For use as supplies in the course of
business; or
d. For use as materials supplied in the
sale of service; or
e. For use in trade or business for
which deduction for depreciation or
amortization is allowed under this
Code, except automobiles, aircraft
and yachts.

2. Purchase of services on which a VAT has

been actually paid. (Sec. 110 [A][1], NIRC)

Q: What are included as input tax credits?

A:
1. Transactions deemed sale
2. Transitional input tax credits
3. Presumptive input tax credits
4. Purchase of real properties for which a
VAT has actually been paid
5. Transitional input tax credits allowed under
the transitory and other provisions of the
Regulations
6. Creditable Withholding VAT on payments
to non-residents

Q: What is transitional input tax credit?

A: It is an input tax credit allowed to person who

becomes liable to value-added tax or any person
who elects to be a VAT-registered person. The
allowed input tax shall be whichever is higher
between:
1. 2% of the value of the taxpayer s
beginning inventory of goods, materials
and supplies;or
2. The actual value-added tax paid on such
goods. (Sec.111[A], NIRC)

Q: What is the purpose of transitional input tax

credit?

A: It operates to benefit newly VAT-registered

persons, whether or not they previously paid taxes
in the acquisition of their beginning inventory of
goods, materials, and supplies. During that period
of transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the
impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to
remit a significant portion of the income it derived
from its sales as output VAT. The transitional input
tax credit mitigates this initial diminution of the
taxpayer s income by affording the opportunity to
offset the losses incurred through the remittance of
the output VAT at a stage when the person is yet
unable to credit input VAT payments. (Fort
Bonifacio Development Corporation v. CIR, G.R. No.
158885; G.R. No. 170680, Apr. 2, 2009)

Q: Is the allowance for transitional input tax credit

applicable to real property?

A: Yes. Under Sec. 105 of the old NIRC (now Sec.

111[A]), the beginning inventory of goods forms
part of the valuation of the transitional input tax
credit. Goods, as commonly understood in the
business sense, refer to the product which the VATregistered person offers for sale to the public. With
respect to real estate dealers, it is the real
properties themselves which constitute their
goods . Such real properties are the operating
assts of the real estate dealer. (Ibid.)

Q: What is presumptive input tax credit?

A: It is an input tax credit allowed to persons or

firms engaged in the:
1.
a.
b.
c.

processing of:
sardines
mackerel
milk

2. manufacturing of:
a. refined sugar
b. cooking oil

c. packed noodle based instant meals

The allowed input tax shall be equivalent to four

percent (4%) of the gross value in money of their
purchases of primary agricultural products which
are used as inputs to their production. (Sec. 111 [B],
NIRC)

Note: The term 'processing' shall mean pasteurization,

canning and activities which through physical or
chemical process alter the exterior texture or form or
inner substance of a product in such manner as to
prepare it for special use to which it could not have
been put in its original form or condition.

Persons Who Can Avail of Input Tax Credit

Q: To whom shall the input tax be creditable?

A:
1. To the purchaser upon consummation of
sale and on importation of goods or
properties; and
2. To the importer upon payment of the VAT
prior to the release of the goods from the
custody of the Bureau of Customs.

However, in the case of purchase of

services, lease or use of properties, the
input tax shall be creditable to the
purchaser, lessee or licensee upon
payment of the compensation, rental,
royalty or fee. (Sec. 110 [A][2], NIRC)

DETERMINATION OF OUTPUT/INPUT TAX; VAT

PAYABLE; EXCESS INPUT TAX CREDITS

Q: How is output tax determined?

A: Sellers of goods or properties:

Gross selling price (X) VAT rate

Sellers of service:
Gross receipts (X) VAT rate

Determination of Input Tax Creditable

Q: How is creditable input tax determined?

A: The sum of the excess input tax carried over

from the preceding month or quarter and the input
tax creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the
amount of claim for refund or tax credit for VAT and
other adjustments, such as purchase returns or
allowances and input tax attributable to exempt
sale.

The claim for tax credit referred to in the foregoing

paragraph shall include not only those filed with the
BIR but also those filed with other goverment
agencies, such as the Board of Investments or the
Bureau of Customs [Sec. 110 [C], NIRC]

Allocation of Input Tax on Mixed Transactions

Q: May a VAT- registered person who is also

engaged in transactions not subject to VAT be
allowed tax credit?

A: Yes. A VAT-registered person who is also

engaged in transactions not subject to the VAT shall
be allowed tax credit as follows:
1. Total input tax which can be directly
attributed to transactions subject to
value-added tax; and
2. A ratable portion of any input tax which
cannot be directly attributed to either
activity. (Sec. 110 [A][3], NIRC)

Q: How is input tax allocated on mixed

transactions?

A: A VAT-registered person who is also engaged in

transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to
VAT as follows:

1. All the input taxes that can be directly

attributed to transactions subject to VAT
may be recognized for input tax credit:
provided, that input taxes which are
directly attributable to VAT taxable sales
of goods and services from the
Government or any of its political
subdivisions, instrumentalities or
agencies, including GOCCs shall not be
credited against output taxes arising from
sales to non-government entities.

2. If any input tax cannot be directly

attributed to either a VAT taxable or VATexempt transaction, the input tax shall be
pro-rated to the VAT taxable and VATexempt transactions; only the ratable
portion pertaining to transactions subject
to VAT may be recognized for input tax
credit

Note:
Input tax attributable to VAT-exempt sales shall not be
allowed as credit against the output tax but should be
treated as part of cost of goods sold

For persons engaged in both zero-rated sales and nonzero rated sales, the aggregate input taxes shall be
allocated ratably between the zero-rated and non-zero
rated sales

Determination of the output tax and VAT payable

and computation of VAT payable or excess tax
credits

Q: How to compute the VAT payable?

A: Output tax
LESS: Input tax__________
VAT payable/ ecess tax credits

Q: What are the rules in computing VAT?

A:
1. If at the end of any taxable quarter the
output tax exceeds the input tax
The
excess shall be paid by the VAT-registered
person.

2. If the input tax exceeds the output tax

The excess shall be carried over to the
succeeding quarter or quarters.

Note: Any input tax attributable to the purchase of

capital goods or to zero-rated sales by a VAT-

registered person may at his option be refunded or

credited against other internal revenue taxes, subject
to the provisions of Section 112.

SUBSTANTIATION OF INPUT TAX CREDITS

Q: What are the substantiation requirements for

input tax credits?
A:

Transactions
Required Support
Input taxes on domestic
purchases of goods or
properties made in the
course of trade or
business
VAT invoice
Input tax on purchases of
real property

a. Cash/deferred basis

b. Installment basis

Public instrument (i.e.,

deed of absolute sale,
deed of conditional sale,
contract/agreement to
sell, etc.) together with
the VAT invoice for the
entire selling price and
non-VAT Official Receipt
for the initial and
succeeding payments.

Public instrument and

VAT Official Receipt for
every payment
Input tax on domestic
purchases of service

VAT Official Receipt

Input tax on importation
of goods

Import entry or other

equivalent document
showing actual payment

of VAT on the imported

goods
Transitional input tax

Inventory of goods as
shown in a detailed list to
be submitted to the BIR
Input tax on
transaction

deemed sale

Required invoices

Input tax from payments

made to non-residents
(such as for services,
rentals, or royalties)
Monthly Remittance
Return of Value Added
Tax Withheld (BIR Form
1600) filed by the resident
payor in behalf of the
non-resident evidencing
remittance of VAT due
which was withheld by
the payor.
Advance VAT on sugar
Payment order showing
payment of the advance
VAT

REFUND OR TAX CREDIT OF EXCESS INPUT TAX

Who may claim for refund/apply for issuance of

tax credit certificate (TCC)

Q: What are the options available to a VATregistered person, whose sales are zero-rated or
effectively zero-rated?

A:
1. To claim for tax credit; or
2. To claim for refund. (Sec. 112[A], NIRC)

Q: For a claim for tax refund to prosper, what must

the VAT-registered entity prove?

A: The taxpayer must prove the following:

1. That it is a VAT-registered entity;
2. It must substantiate the input VAT paid by
purchase invoices or official receipts
(Commissioner v. Manila Mining
Corporation, G.R. No. 153204, Aug. 31,
2005).

Q: May a taxpayer who has pending claims for VAT

input credit or refund, set off said claims against
his other tax liabilities? Explain your answer.

A: No. Set-off is available only if both obligations

are liquidated and demandable. Liquidated debts
are those where the exact amounts have already
been determined. In the instant case, a claim of the
taxpayer for VAT refund is still pending and the
amount has still to be determined. A fortiori, the
liquidated obligation of the taxpayer to the
government cannot, therefore, be set-off against
the unliquidated claim which the Taxpayer
conceived to exist in his favor. (Philex Mining Corp.
v. CIR, G.R. No. 125704, Aug. 29, 1998) (2001 Bar
Question)

Period to File Claim/Apply for Issuance of TCC

Q: When must the options be availed of?

A: The claim, which must be in writing, for both

cases, must be filed within 2 years after the close of
the taxable quarter when the sales were made
apply for:
1. The issuance of a tax credit certificate;
2. Refund of creditable input tax due or paid
attributable to such sales. (Ibid.)

Note:
The creditable input tax allowed to be refunded does
not include transitional input tax

In case the taxpayer is engaged in zero-rated and also

in taxable or exempt sale, and the amount of
creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it
shall be allocated proportionately on the basis of the
volume of sales

Manner of Giving Refund

Q: What is the manner of giving refund?

A: Refund shall be made upon warrants drawn by

the Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman of Commission on
Audit (COA). Refund shall be subject to post audit
by COA. (Sec 112( D) NIRC)

INVOICING REQUIREMENTS

Invoicing requirements in general

Q: What is required from VAT-registered person to

issue?

A: A VAT-registered person shall issue:

1. A VAT invoice for every sale, barter or
exchange of goods or properties; and
2. A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services. (Sec.
113[A], NIRC)

Q: What are the information contained in the

VAT invoice or VAT official receipts?

A:
1. A statement that the seller is a VATregistered person, and the taxpayer's
identification number (TIN);
2. The total amount which the purchaser
pays or is obligated to pay to the seller
with the indication that such amount
includes the value-added tax: Provided
that:
a. The amount of the tax shall be
shown as a separate item in the
invoice or receipt;
b. If the sale is exempt from valueadded tax, the term "VAT-exempt
sale" shall be written or printed
prominently on the invoice or
receipt;
c. If the sale is subject to zero percent
(0%) value-added tax, the term
"zero-rated sale" shall be written or
printed prominently on the invoice
or receipt;
d. If the sale involves goods, properties
or services some of which are subject
to and some of which are VAT zerorated or VAT-exempt, the invoice or
receipt shall clearly indicate the
breakdown of the sale price between
its taxable, exempt and zero-rated
components, and the calculation of
the value-added tax on each portion
of the sale shall be shown on the
invoice or receipt: "Provided, That
the seller may issue separate
invoices or receipts for the taxable,
exempt, and zero-rated components
of the sale.
3. The date of transaction, quantity, unit
cost and description of the goods or
properties or nature of the service; and
4. In the case of sales in the amount of one
thousand pesos (P1, 000) or more where
the sale or transfer is made to a VATregistered person, the name, business
style, if any, address and taxpayer
identification number (TIN) of the
purchaser, customer or client. (Sec.
113[B], NIRC)

Sample Receipt

ABC CORPORATION
40 Katipunan Ave. Quezon City
VAT Reg. TIN:456-378-112-037-000

April 20, 2009

Sold To: Tommy Corporation
Address: 44 Torro St. Project 8, Quezon City
TIN:478-808-000VAT

Description
Qty.
Unit
Cost
Total
Transaction
Type
Pad Paper
100pcs/box
40
2, 500
100,000

VATable
Poultry
Product
Eggs per
dozen
120
30
3, 600
VAT exempt
Sale
Native
products
for export
56
8, 000
448, 000
Zero-rated

Vatable sales--------------------------------------- 100,000

Vat exempt sale------------------------------------ 3, 600
Zero-rated sale------------------------------------- 448,000
Total Sales------------------------------------------ 551,600
12% Vat--------------------------------------------- 12,000
Total TAXPAYER Payable ----------------------- 563,600

Q: What are the accounting requirements for VAT

registered persons?

A: All persons subject to the VAT under Sec. 106

and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales
journal and subsidiary purchase journal on which
the daily sales and purchases are recorded. (Sec.
113[C], NIRC)

Consequence of Issuing Erroneous VAT Invoice or

VAT Official Receipt

Q: What are the consequences of issuing an

erroneous VAT invoice/VAT official receipt?

A:
1. In case of non-VAT registered person who
issues a VAT invoice/receipt shall be held
liable to:

a. payment of percentage tax if

applicable;
b. payment of VAT without input tax;
c. 50% surcharge on tax due; and
d. the purchaser shall be allowed to
recognize an input tax credit
provided that the invoice/official
receipt contains the required
information.

2. In case of VAT-registered who issues a

VAT invoice/official receipt for a VATexempt sale without the words VAT
Exempt Sale shall be held liable to pay
12% VAT. (Sec. 113[D], NIRC)

Filing of Return and Payment

Q: Who are required to file a VAT return?

A:
1. Every person or entity who in the course
of trade or business, sells or leases goods,
properties, and services subject to VAT, if
the aggregate amount of actual gross
sales or receipts exceed P1.5 million for
any twelve month period
2. A person required to register as VAT
taxpayer but failed to register
3. Any person who imports goods
4. Professional practitioners

Note: Services of Professional Practitioners are subject

to:
VAT if the gross professional fees exceed P1.5 million
for a 12-month period;or

3% percentage tax if the gross professional fees does

not exceed P1.5 million for a 12-month period
(Revenue Regulation No. 16-2005)

Q: State the rules regarding filing of return.

A:
GR: Every person liable to pay the VAT shall file a
quarterly return of the amount of his gross sales
or receipts within 25 days following the close of
each taxable quarter prescribed for each

taxpayer.

XPN: Any person, whose registration has been

cancelled in accordance with Section 236, shall
file a return:
1. Within 25 days from the date of
cancellation of registration;
2. Provided, that only one consolidated
return shall be filed by the taxpayer for
his principal place of business or head
office and all branches. (Sec. 114[A],
NIRC)

Note: VAT-registered shall pay the VAT on a monthly

basis. The monthly return shall be filed not later than
the 20th day following the end of each month.

Q: When should VAT be paid?

A: GR: VAT-registered persons shall pay the VAT on

a monthly basis

XPN: Persons whose registration has been

cancelled in accordance with Section 236 who shall
pay the tax due thereon within 25 days from the
date of cancellation of registration.

Note: Under Section 236 of NIRC, a VAT registered

person may cancel his registration for VAT if:
a. He makes written application and can
demonstrate to the commissioner s
satisfaction that his gross sales or receipts
for the following twelve (12) months, other
than those that are exempt under Section
109(A) to (U), will not exceed one million
five hundred thousand pesos (P1,500,000)
or
b. He has ceased to carry on his trade or
business, and does not expect to
recommence any trade or business within
the next twelve (12) months.

The cancellation of registration will be effective

from the first day of the following month.

WITHHOLDING OF FINAL VAT ON SALES TO

GOVERNMENT

Q: State the rule regarding the withholding of Final

VAT on sales to government.

A: The Government or any of its political

subdivisions, instrumentalities or agencies,
including government owned or controlled
corporations (GOCCs) shall, before making payment
on account of its purchase of goods and/or services
taxed at 12% shall deduct and withhold a final VAT
of 5% of the gross payment. (Section 114(C), NIRC)

Note:
The five percent (5%) final VAT withholding rate shall
represent the net VAT payable to the seller

The remaining seven percent (7%) effectively accounts

for the standard input VAT for sales of goods or
services to government or any of its political
subdivisions, instrumentalities or agencies including
GOCCs, in lieu of the actual Input VAT directly
attributable or ratably apportioned to such sales.

Should actual input VAT attributable to sale to

government exceed seven percent (7%) of gross
payments, the excess may form part of the seller s
expense or cost

If actual input VAT attributable to sale to government

is less than 7% of gross payment, the difference must
be closed to expense or cost.

COMPLIANCE REQUIREMENTS

Administrative Requirements

Registration Requirements

Q: How many times should a person subject to any

internal tax revenue register?

A: Once.

Q: Where shall he register?

A: With the appropriate Revenue District Officer.

Q: When shall he register?

A: One shall register:

1. Within 10 days from date of employment;
or
2. On or before commencement of business;
or
3. Before payment of any tax; or
4. Upon filing of a return, statement, or
declaration as required in the code. (Sec.
236, NIRC)

Q: What shall the registration contain?

A: It shall contain the taxpayer s name, style, place

of business, and such other information as may be
required by the Commissioner.

Q: What is a facility?

A: Facility may include but not limited to sale

outlets, places of production, warehouses or
storage places.

Q: What is required of a person who maintains a

head office, branch or facility?

A: He shall register with the Revenue District Officer

who has jurisdiction over the head office, branch or
facility. (Sec. 236, NIRC)

Q: How much is the annual registration fee?

A: An annual registration fee in the amount of P500

for every separate or distinct establishment or
place of business, including facility types where
sales transactions occur, shall be paid upon
registration and every year thereafter on or before
the last day of January. (Sec. 236B, NIRC)

Q: Who are exempted from the annual registration

fee?

A: The following are exempted from payment of

annual registration fee:
1. Cooperatives;
2. Individuals earning purely compensation
income (locally or abroad);
3. Overseas workers. (Sec. 236B, NIRC)

Q: What shall be registered?

A: He shall register each type of internal revenue

tax for which he is obligated, file a return and pay
such taxes. He shall also update the registration
information with the Revenue District Office where
he is registered, specifying any changes in tax type
and other details. (Sec. 236C, NIRC)

Q: What shall the BIR do after the taxpayer

registers?

A: The BIR shall assign a Taxpayer Identification

Number (TIN) which the taxpayer shall indicate in
every return, statement and document filed with
the BIR.

Q: What is the General Rule in the Cancellation of

Registration?

A: The registration of any person who ceases to be

liable to a tax type shall be cancelled upon filing
with RDO an application for registration
information update. (Sec. 236 F1)

Q: What is the penalty for failure to register?

A: The Commissioner has the power to suspend the

business of any person who fails to register.

Persons Required To Register For VAT

Q: Who are the persons required to register for

VAT?

A: Every person who in the course of trade of

business sells, barter, or exchanges goods or
properties, or engages in the sale or exchange of
goods, services subject to VAT if:

1. The Gross sale or gross receipts have

exceeded 1.5 million or
2. There are reasonable grounds to believe
that his gross sales in the next 12 month
shall exceed 1.5 million.

Q: Who is a VAT-registered person?

A: Any person who has registered VAT as a tax type

in accordance with Subsection C shall be referred to

as a VAT-registered person who shall be assigned

only one TIN. (Sec. 236 H)

Q: What is the effect of a franchise grantee of

radio and TV broadcasting, whose annual gross
receipts for the preceding year do not exceed ten
million, who opts for VAT registration?

A: The registration becomes irrevocable.

Q: Who may optionally register for VAT?

A: Any person who is not required to register for

VAT under Subsection G may elect to register for
VAT by registering with the RDO that has
jurisdiction over the head office of that person, and
paying the annual registration fee in Subsection B.
(Sec. 236H, NIRC)

Note: Under RR-16-05

1. Any person who is VAT-exempt under Sec. 4.
109-1 (VAT- exempt transactions) may elect
to be Vat-registered.
2. Any person who is VAT-registered but enters
into transaction which are exempt from VAT
(mixed transactions) may opt that the VAT
apply to his transaction which would have
been exempt under Section 109 (2) of the
Tax Code. Registration is irrevocable for
three years.
3. Franchise grantees of radio and television
broadcasting with annual gross receipts of
the preceding year do not exceed 10 million
may opt for VAT registration. Registration is
irrevocable.

Q: What is the effect of optional registration?

A: He shall not be entitled to cancel his registration

under Subsection F 2 for the next 3 years, except a
franchise grantee, with gross receipts of 10 million
and below, who opts for VAT registration.

Q: What is required for the cancellation of VAT

registration?

A:
1. The VAT-registered person makes written
application and demonstrates to the
Commissioner s satisfaction that his gross
sales or receipts for the following 12
months, other than those that are exempt
under Section 109 1A to U, will not
exceed P1.5 million.
2. He has ceased to carry on his trade or
business and does not expect to
recommence any trade or business within
the next 12 months. (Sec. 236 [F2], NIRC)

Q: When is the cancellation effective?

A: It is effective from the first day of the following

month. (Sec. 236[F2], NIRC)

Q: What are the other instances where a VATregistered person may apply for cancellation of
registration?

A:
1. A change of ownership, in case of a single
proprietorship
2. Dissolution of a partnership or
corporation
3. Merger or consolidation with respect to
the dissolved corporation
4. A person who has registered prior to
commencement of a planned business,
but failed to actually start his business

Q: What is the tax on persons who are exempt

from VAT?

A: Persons who are exempt from the payment of

VAT and who is not a VAT-registered person shall

pay a tax equivalent to three percent (3%) of his
gross quarterly sales or receipts, except
cooperatives shall not be held liable to pay for
three percent (3%) gross receipts tax.

Supplying Taxpayer Identification Number (TIN)

Q: How many TI numbers shall a tax payer must

have?

A: Only one TIN. Any person who secures more

than one TIN shall be criminally liable. (Sec. 236 [I],
NIRC)

Issuance of Reciepts of Sales or Commercial

Invoices

Q: When are receipts or Sales or Commercial

Invoices issued?

A: All persons subject to an internal revenue tax

shall, for each sale or transfer of merchandise or for
services rendered valued at 25 pesos or more, issue
duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the
date of transaction, quantity, unit cost and
description of merchandise or nature of service.
(Sec. 237, NIRC)

Q: How many years should the issuer and

purchaser keep the receipts?

A: They shall keep the receipts for a period of three

years from the close of the taxable year in which
such invoice was issued. (Sec. 237, NIRC)

Q: Is there a need for an authority to print receipts

from the BIR?

A: Yes. All persons who are engaged in business

shall secure from the BIR an authority to print
receipts or sales or commercial invoices before a
printer can print the same. (Sec. 238, NIRC)

Q: What are required in the printing of receipts?

A: Receipts must be serially numbered and shall

show the name, style, TIN and the business address
of the person. (Sec. 238, NIRC)

Q: What are the accounting requirements for VAT

registered persons?

A: All persons subject to the VAT under Sec. 106

and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales
journal and subsidiary purchase journal on which
the daily sales and purchases are recorded. (Sec.
113[C], NIRC)

Q: What are the information contained in the VAT

invoice or VAT official receipts?

A:
1. A statement that the seller is a VATregistered person, and the taxpayer's
identification number (TIN);
2. The total amount which the purchaser
pays or is obligated to pay to the seller
with the indication that such amount
includes the value-added tax: Provided
that:

a. The amount of the tax shall

be shown as a separate
item in the invoice or
receipt;
b. If the sale is exempt from
value-added tax, the term
"VAT-exempt sale" shall be
written or printed
prominently on the invoice
or receipt;
c. If the sale is subject to zero
percent (0%) value-added
tax, the term "zero-rated
sale" shall be written or
printed prominently on the
invoice or receipt;
d. If the sale involves goods,
properties or services
some of which are subject
to and some of which are
VAT zero-rated or VATexempt, the invoice or
receipt shall clearly
indicate the breakdown of
the sale price between its
taxable, exempt and zerorated components, and the
calculation of the valueadded tax on each portion
of the sale shall be shown
on the invoice or receipt:
"Provided, That the seller
may issue separate
invoices or receipts for the
taxable, exempt, and zerorated components of the
sale.
3. The date of transaction, quantity, unit
cost and description of the goods or
properties or nature of the service; and
4. In the case of sales in the amount of one
thousand pesos (P1, 000) or more where
the sale or transfer is made to a VATregistered person, the name, business
style, if any, address and taxpayer
identification number (TIN) of the
purchaser, customer or client. (Sec.
113[B], NIRC)

Q: What are the consequences of issuing an

erroneous VAT invoice/VAT official receipt?

A:
1. In case of non-VAT registered person

who issues a VAT invoice/receipt

shall be held liable to:

a. payment of percentage tax if

applicable;
b. payment of VAT without input
tax;
c. 50% surcharge on tax due; and
d. the purchaser shall be allowed
to recognize an input tax credit
provided that the
invoice/official receipt contains
the required information.
3. In case of VAT-registered who issues
a VAT invoice/official receipt for a
VAT-exempt sale without the words
VAT Exempt Sale shall be held
liable to pay 12% VAT. (Sec. 113[D],
NIRC)

Exhibition Of Certificate Of Payment At Place Of

Business

Q: Is the certificate of payment required to be

exhibited?

A: Yes. The certificate or receipts showing payment

of taxes issued to a person engaged in a business
subject to an annual registration fee shall be kept
conspicuously exhibited in plain view in or at the
place where the business is conducted. Peddlers are
required to show the certificate upon demand. (Sec.
241, NIRC)

Continuation Of Business Of Deceased Person

Q: What is required in cases of continuation of

business of a diseased person or transfer of
ownership or change of name of business
establishment?

A: The person interested in the estate should

submit to the BIR inventories of goods and stocks
had at the time of such death, transfer or change of
name. (Sec. 242, NIRC)

Q: In case of continuing the business of a deceased

person, is there an additional fee to be paid?

A: None. No additional payment shall be required

for the residue of the term of which the tax was
paid. (Sec. 242, NIRC)

Removal of business to other location

Q: Is the taxpayer required to pay another annual

registration fee in case his business is transferred

to another place?

A: Any business for which the annual registration

fee has been paid may be removed and continued
in any other place without the payment of
additional tax during the term for which the
payment was made subject to the rules prescribed
by the Secretary of Finance and upon
recommendation of the Commissioner. (Sec. 243,
NIRC)

TAX RETURNS

Income Tax Return

Q: What is a tax return?

A: A tax return is a report made by the taxpayer to

the BIR on all gross income received during the
taxable year, the allowable deduction including
exemptions, the net taxable income, the income tax
rate, the income tax due, the income tax withheld,
if any, and the income tax still to be paid or
refundable.

Individual Tax Return

Q: Who are required to file an Income Tax Return

(ITR)?

A: The following individuals are required to file an

income tax return:
a. Resident citizens receiving
income from sources within or outside
the Philippines
i. Individuals deriving
compensation income
from 2 or more
employers,
concurrently or

successively at anytime
during the taxable year;
ii. Employees deriving
compensation income
regardless of the
amount, whether from
a single or several
employers during the
calendar year, the
income tax of which
has not been withheld
correctly resulting to
collectible or
refundable return;
iii. Employees whose
monthly gross
compensation income
does not exceed 5,000
or the statutory
minimum wage,
whichever is higher,
and opted for nonwithholding of tax on
said income;
iv. Individuals deriving
non-business, nonprofessional related
income in addition to
compensation income
not otherwise subject
to a final tax;
v. Individuals receiving
purely compensation
income from a single
employer, although the

income of which has

been correctly
withheld, but whose
spouse is not entitled
to substituted filing.
b. Non-resident citizens
receiving income from sources within the
Philippines.
c. Citizens working abroad
receiving income from sources within the
Philippines.
d. Aliens, whether resident or
not, receiving income from sources within
the Philippines.

Q: Who are the individuals not required to file an

ITR?

A:
1. An individual whose gross income does
not exceed the total personal and
additional exemptions;
2. An individual with respect o pure
compensation derived from sources
within the Philippines, the income tax on
which has been correctly withheld;
3. An individual whose sole income has been
subjected to final withholding tax;
4. A minimum wage earner or who are
exempt from income tax. (Sec.51, NIRC)

Note: Individuals not required to file an income tax

return may nevertheless be required to file an
information return. Under R.A. 9504, minimum wage
earners are granted full tax exemption from paying
income tax.

Q: What is the rule on married individuals

return?

tax

A: Married individuals, whether citizens, resident,

or non-resident aliens, who do not derive income
purely from compensation, shall file a return for the

taxable year to include the income of both spouses.

If it is impracticable to file one return, each spouse
may file a separate return of income but the returns
so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year. (Sec.
51 [D], NIRC)

Q: What is the rule on income of unmarried

minors / children?

A:
GR: The income of unmarried minors derived
from property received from a living
parent shall be included in the return of
the parent.

XPNs:
1. when the donor s tax has been paid
on such property or
2. when the transfer of such property
is exempt from donor s tax. (Sec. 51
[E], NIRC)

Q: Who may file a return for the disabled

taxpayer?

A: If the taxpayer is unable to make his own return,

the return may be made by his duly authorized
agent or representative or by the guardian or other
person charged with the care of his person or
property, the principal and the representative or
guardian assuming the responsibility of making the
return and incurring penalties provided for
erroneous, false or fraudulent returns. (Sec. 51[F],
NIRC)

Q: Where to file the ITR?

A: Except in cases where the Commissioner

otherwise permits, the return shall be filed with any
authorized agent bank, Revenue District Officer,
Collection agent or duly authorized Treasurer of the
municipality or city where such person has his legal

residence or principal place of business or if there

be no legal residence or principal place of business,
with the Office of the Commissioner. For nonresident citizens, with the Philippine Embassy or
nearest Philippine Consulate or mailed directly to
CIR. (Sec.51 [B], NIRC)

Q: When to file the ITR?

A: The return of any individual required to file the

same shall be filled on or before April 15th day of
each year covering income for the preceding
taxable year.

However, individuals who are self-employed or in

practice of a profession are required to file and pay
estimated income tax every quarter as follows:
1. First Quarter - April 15
2. Second Quarter - August 15
3. Third Quarter - November 15
4. Final Quarter - April 15 of the following
year

Q: When do individuals subject to capital gains tax

file a tax return?

A:
1. From the sale or exchange of shares
of stock not traded thru a local stock
exchange as prescribed under
Section 24 (C) shall file a return

within 30 days after each transaction

and a final consolidated return on or
before April 15 of each year covering
all stock transactions of the
preceding taxable year; and
2. From the sale or disposition of real
property under Section 24 (D) shall
file a return, within 30 days following
each sale or other disposition. (Sec.
51 [C][2], NIRC)

Q: What is the confidentiality rule with respect to

tax returns filed with the BIR?

A: This means that although Sec. 71 of the NIRC

provides that the tax returns shall constitute public
records, it is necessary to know that these are
confidential in nature and may not be inquired into
in unauthorized cases under the pain of penalty
provided for in Sec. 270 of the NIRC.

Note: For conviction of each act or omission, the

penalty of fine of not less than P50,000 but not more
than P100,000 or imprisonment of not less than 2
years but not more than 5 years.

Q: What are the instances wherein inquiry into the

income tax returns of taxpayers may be
authorized?

A: Inquiry into the ITR of taxpayers may be had

when:
1. the inspection of the return is authorized
upon the written order of the President of
the Philippines;
2. the inspection is authorized under
Finance Regulation No. 33 of the
Secretary of Finance;
3. the production of the tax return is a
material evidence in a criminal case
where the Government is interested in
the result;
4. the production or inspection thereof is
authorized by the taxpayer himself.

Q: What is substituted filing?

A: It is when the employer s annual return may be

considered as the .substitute Income Tax Return
(ITR) of an employee inasmuch as the information
provided in his income tax return would exactly be
the same information contained in the employer s
annual return.

Q: What are the conditions for the substitute filing

of ITR?

A:
1. Employee receives purely compensation
income, regardless of amount, during the
taxable year;
2. He receives the income only from one
employer;
3. Income tax withheld is equal to income
tax due;
4. Employer filed information return
showing the income tax withheld on
employees compensation income. (RR No.
3-2002)

Corporate Returns

Q: Who are required to file a Corporate Tax

Return?

A:
GR: Every corporation subject to tax under the

NIRC shall file a corporate tax return.

XPN: Foreign corporations not engaged in trade

or business in the Philippines (Sec. 52, NIRC)

Q: What are the requirements for corporations in

filing their returns?

A: Every corporation subject to the tax under the

code, except foreign corporation not engaged in
trade or business, shall render, induplicate, a true
and accurate quarterly income tax return and final
or adjustment return. The returns shall be filed by
the president, vice-president or other principal
officer, and shall be sworn to by such officer and by
the treasurer or assistant treasurer. (Sec. 52, NIRC)

Q: What shall be the accounting period that a

corporation may employ as its basis for filing its
annual income tax return?
A: A corporation may employ either a calendar year
or fiscal year, provided, that the corporation may
not change the accounting period employed
without prior approval from the Commissioner in
accordance with the provisions os Section 47 of the
NIRC. (Sec. 52 [B])

Q: What is the rule on the declaration of quarterly

corporate income tax?

A: Every corporation shall file in duplicate a

quarterly summary declaration of its gross income
and deductions on a cumulative basis for the
preceding quarter or quarters upon which the
income tax shall be levied, collected and paid. The
tax so computed shall be decreased by the amount

of tax previously paid or assessed during the

preceding quarters and shall be paid not later than
60 days from the close of each of the 3 quarters of
the taxable year, whether calendar or fiscal year.
(Sec. 75, NIRC)

Q: What is the Final Adjustment Return?

A: It is a return that covers the total taxable income

of a corporation for the preceding calendar or fiscal
year. The quarterly tax payments are in the nature
of advances or portions of the annual income tax
due. They have to be adjusted at the end of the
calendar or fiscal year through the Final Adjustment
return.

Q: What is the rule as regards the declaration by a

corporation of its income adopting a final
adjustment return?

A: Every corporation liable to tax under Section 27

shall file a final adjustment return covering the
taxable income for the preceding calendar or fiscal
year.

Q: What are the options of the corporation if the

sum of the quarterly tax payments made during
the taxable year is not equal to the total tax due
on the entire taxable year?

A:
1. Pay the balance of tax still due; or
2. Carry-over the excess credit;
3. Be credited or refunded with the excess
amount paid, as the case may be. (Sec. 76,
NIRC)

Note: In case the corporation is entitled to a tax

credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its
final adjustment return may be carried over and
credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding

taxable years. (Sec. 76, NIRC)

Q: Is the option of carry- over exclusive?

A: Yes. Once the option to carry-over and apply the

excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable
quarters has been made, such option shall be
considered irrevocable for the taxable period and
no application for cash refund or issuance of tax
credit certificate shall be allowed. (Sec. 76, NIRC)

Q: What is the importance of the Final Adjustment

Return to the refund of erroneously paid taxes?

A: The two year period shall be computed from the

time of filing the adjustment return or annual
income tax return and final payment of income tax.
(Atlas Consolidated v. CIR, June 8, 2007)

Q: When does a corporation file the income tax

return?

A: The corporate quarterly declaration shall be filed

within sixty days (60) following the close of each of
the first three quarters of the taxable year. (Sec.
77[B], NIRC)

The final adjustment return shall be filed on or

before the 15th day of April, or on or before the 15th
day of the fourth month following the close of the
fiscal year, as the case may be. (Sec. 77[B], NIRC)

For return on capital gains realized from sale of

shares of stocks not traded in the local stock
exchange, the corporation shall file a return 30 days
after each transaction and a final consolidated
return of all transactions during the taxable year on
or before the 15th day of the 4th month following
the close of the taxable year. (Sec. 52[D], NIRC)

Q: Where does a corporation file the tax returns?

A: The quarterly income tax return and final

adjustment return shall be filed with the authorized
agent banks or Revenue District Officer or
Collection agent or duly authorized treasurer of the
city or municipality having jurisdiction over the
location of the principal office of the corporation
filing the return or place where its main books of
accounts and other data from which the return is
prepared are kept. (Sec. 77[A], NIRC)

Q: Is an extension of time allowed in the filing of

return?

A: Yes. The Commissioner, may, in meritorious

cases, grant a reasonable extension of time for
filing returns of income (or final and adjustment
returns in case of corporations), subject to the
provisions of Section 56 of the NIRC. (Sec.53, NIRC)

Q: What is required from a Corporation

Contemplating Dissolution or Reorganization as
regards the filing of return?

A: Every corporation shall, within 30 days after the

adoption by the corporation of a resolution or plan
for its dissolution; or for the liquidation of the
whole or any part of its capital stock, including a
corporation which has been notified of possible
involuntary dissolution by the SEC; or for its
reorganization, shall render a correct return to the

Commissioner, verified under oath, setting forth

the terms of such resolution or plan and such other
information as the Secretary of Finance, upon
recommendation of the Commissioner, shall by
rules and regulations, prescribe. (Sec. 52[C], NIRC)

Note: The dissolving or reorganizing corporation, shall

prior to the issuance by the SEC of the certificate of
dissolution or Reorganization, secure a certificate of
tax clearance from the BIR which shall be submitted to
the SEC. (Sec. 52[C], NIRC)

Q: What is the rule on returns of receivers,

trustees in bankruptcy or assignees?

A: In cases wherein receivers, trustees or assignees

are operating the property or business of a
corporation, they shall make returns of net income
as and for such corporation, in the same manner
and form as such organization is hereinbefore
required to make returns. Any tax due on the
income as returned by receivers, trustees or
assignees shall be assessed and collected in the
same manner as if assessed directly against the
organizations of whose businesses or properties
they have custody or control. (Sec. 54, NIRC)

Q: What is the rule on the returns of General

Professional Partnership?

A: Every general professional partnership shall file,

in duplicate, a return of its income, except income
exempt under Section 32 B, setting forth the items
of gross income and of deductions allowed by this
title, and the names, TIN, addresses and shares of
each of the partners. (Sec. 55, NIRC)

Note: A GPP is not subject to income tax, but it is

required to file a return of its income for the purpose
of furnishing information as to the share in the gains or
profits which each partner shall include in his
individual return. The individual partner is taxable on
his distributive share of the net income of the
partnership, whether distributed or not, and are
required to include such distributive shares in their
individual returns (Sec. 22, Regs. No. 2 as amended).

Q: What are the rules governing Fiduciary

Returns?

A: Guardians, trustees, executors, administrators,

receivers, conservators and all persons or
corporations, acting in any fiduciary capacity, shall
render, in duplicate, a return of the income of the
person, trust or estate for whom or which they act,
in case such person, trust, estate has a gross
income of 20,000 pesos or over during the taxable
year.

Such fiduciary or person filing the return for him or

it, shall take oath that he has sufficient knowledge
of the affairs of such person, trust or estate to
enable him to make such return and that the same
is, to the best of his knowledge and belief, true and
correct, and subject to the provisions applicable to
individual taxpayers under Title II of the NIRC.

Note: The return made by or for one or two or more

joint fiduciaries filed in the province where such
fiduciaries reside, shall be a sufficient compliance with
the requirements of Sec. 65, NIRC.

Furthermore, trustees, executors, administrators and

other fiduciaries are indemnified against the claims or
demands of every beneficiary for all payments of taxes
which they shall be required to pay, and they shall
have credit for the amount of such payments against
the beneficiary or principal in any accounting which
they make as such trustees or other fiduciaries. (Sec.
66, NIRC)

Estate Tax Return

Q: When is a notice of death required to be filed?

A: A notice of death is required to be filed:

1. In all cases of transfers subject to tax; or
2. Even if exempt from tax, if gross value of
estate exceeds P20,000. (Sec. 89, NIRC)

Q: Who shall file the notice of death?

A: Notice of death must be filed by the executor,

administrator or any of the legal heirs, as the case
may be. (Sec. 89, NIRC)

Q: When must the notice of death be filed?

A: It shall be filed within two (2) months after

decedent s death or within the same period after
qualifying as such executor or administrator. (Sec.
89, NIRC)

Q: To whom shall the notice be filed?

A: The notice shall be filed with the Commissioner.

(Sec. 89, NIRC)

Q: When is an Estate Tax Return required?

A: An estate tax return is required:

1. In all cases of transfers subject to tax;
2. Even though exempt, where gross value
of estate exceeds P200,000;
3. When the gross estate consists of
registered or registrable property,
regardless of amount.(Sec.90, NIRC)

Note: Real property, motor vehicle, shares of stocks

and other similar properties are considered registered
or registrable property.

Q: Who shall file the Estate Tax Return?

A: The return shall be filed by:

1. The executor, or administrator, or any of
the legal heirs of the decedent, whether
resident or non-resident of the
Philippines
2. any person in actual or constructive
possession of any property of the
decedent.

Q: When must this return be filed?

A: The return must be filed within six (6) months

from the decedent's death. (Sec. 90 [B]), NIRC)

Note: Extension of time for the filing of the return, on

meritorious cases, may be allowed by the
Commissioner. The period of extension is limited to a
period not exceeding thirty (30) days. (Sec. 90 [C]),
NIRC)

Q: Where must the return be filed?

A:
If it is a Resident Decedent
i. Authorized Agent Bank (AAB) or
ii. Revenue District Officer (RDO),
Collection Officer, or
iii. Duly authorized Treasurer of the city
or municipality in which the
decedent was domiciled at the time
of his death, or
iv. Any other place where the CIR
permits the estate tax return to be
filed (Sec. 90 [D], NIRC)

If it is a Non-Resident Decedent
i. Office of the CIR
ii. Revenue District Officer or
iii. Philippine Embassy or Consulate in
the country where decedent is
residing at the time of his/her death
iv. Any other place where the CIR
permits the estate tax return to be
filed

Donor s Tax Return

Q: Is a notice of donation required?

A:
GR: Notice of donation is not required.

XPN:
1. Donation to NGO worth at least P50, 000
Provided, not more than 30% of which
will be used for administration purposes.
2. Donation to any candidate, political party,
or coalition of parties

Q: Who shall file the notice of donation?

A: Any person making a donation shall file such

notice, unless the donation is specifically exempted
under NIRC or other special laws. (Sec.103 [A],
NIRC)

Q: When must this return be filed?

A: Any person making a donation shall file a return

within 30 days after the date the gift is made.

(Sec.103 [B], NIRC)

Q: Where to file the return?

A: The return must be filed with:

1. AAB, RDO, RCO, or duly authorized
treasurer of the City or municipality
where the donor was domiciled at the
time of the transfer;
2. If there is no legal residence in the
Philippines, with the office of the
Commissioner;
3. For gifts made by non-residents, with the
Phil embassy or Consulate in the country
where he is domiciled at the time of the
transfer or directly with the office of the
Commissioner. (Sec.103 [B], NIRC)

VAT Return

Q: What is the rule governing the filing of a VAT

return?

A: Every person liable to pay VAT shall file a

quarterly return of the amount of his gross sales or
receipts within 25 days following the close of each
taxable quarter. However, a VAT-registered person
shall pay the VAT on a monthly basis.

Any person, whose registration has been cancelled,

shall file a return and pay the tax due within 25
days from the date of cancellation of registration;
Provided, that only one consolidated return shall be
filed by the taxpayer for his principal place of
business or head and all his branches. (Sec. 114[A],
NIRC)

Q: Where must the return be filed?

A: Except as the Commissioner otherwise permits,

the return shall be filed with the authorized agent
bank, revenue collection officer or duly authorized
city or municipal treasurer in the Philippines located
within the revenue district where the taxpayer is
registered or required to register. (Sec. 114 [B],
NIRC)

Withholding Tax Return

Q: What is the rule as regards the filing of

Withholding Tax Return?

A: Taxes deducted and withheld under Sec.57 by

withholding agents shall be covered by a return and
paid to, except in cases where the Commissioner
otherwise permits, an authorized agent bank,
revenue district officer, collection agent or duly
authorized treasurer of the city or municipality
where the withholding agent has his legal residence
or place of business, or where the withholding
agent is a corporation, where the principal office is
located. (Sec.58, NIRC)

Note: The taxes deducted and withheld by the

withholding agent shall be held as special fund in trust
for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and

the payment made within 25 days from the close of
each calendar quarter, while the return for creditable
withholding taxes shall be filed and payment made not
later than the last day of the month following the close
of the quarter during which the withholding was
made; Provided, that the Commissioner, with the
approval of the Secretary of Finance, may require
these withholding agents to pay or deposit the taxes
deducted or withheld at more frequent intervals when
necessary to protect the interest of the government.
(Sec.58[B], NIRC)

PAYMENT OF TAXES

Income Tax

Q: What is the manner of paying income tax?

A:
GR: Pay-as-you-file system.

Note: It is a system where the income tax shown on

the return should be paid at the time the return is
filed.

In case of tramp vessels, the shipping agents and/or

the husbanding agents, and in their absence, the
captains thereof are to file a return and pay the tax
due thereon before their departure. Upon failure to
file the return and pay the tax due, the Bureau of
Customs is authorized to hold the vessel and
prevent its departure until proof of payment of the
tax is presented or a sufficient bond is filed to
answer for the tax due. (Sec. 56 [A][1], NIRC)

XPN: When the tax due is in excess of Two

Thousand Pesos (P2,000.00), the taxpayer other
than a corporation may elect to pay in two (2) equal
installments in which case:
a. the first installment shall be paid at the
time the return is filed and
b. the second installment, on or before July
15 following the close of the calendar
year.

If any installment is not paid on or before the date

fixed for its payment, the whole amount of the tax
unpaid becomes due and payable, together with
the delinquency penalties. (Sec. 56 [A][2], NIRC)

Q: What is the rule as regards the payment of

capital gains tax?

A: The total amount of tax imposed and prescribed

under Sec.24[C], 24[D], 27[E][2], 28[A][8][c], and
28[B][5][c] shall be paid on the date the return is
filed; Provided, that if the seller submits proof of his
intention to avail himself of the benefit of
exemption of capital gains under existing special
laws, no such payment shall be required.

In case of failure to qualify for exemption, the tax

due on the gains realized from the original
transaction shall immediately become due and
payable, and subject to the penalties prescribed
under the rules and the NIRC.

If the seller, having paid the tax, submits such proof

of intent within 6 months from the registration of
the document transferring the real property, he
shall be entitles to a refund of such tax upon
verification of his compliance with the
requirements for such exemption.

In case the taxpayer elects and is qualified to report

the gin by installments under Sec.49 of the NIRC,
the tax due from each installment shall be paid
within 30 days from receipt of such payments.
(Sec.56 [A] [3], NIRC)

Note: No registration of any document transferring

real property shall be effected by the Register of
deeds unless the Commissioner or his duly
authorized representative has certified that such
transfer has been reported, and the tax imposed, if
any, has been paid. (Sec.56 [A] [3], NIRC)

Q: When does a corporation pay the income tax?

A: The income tax due on the corporate quarterly

returns and the final adjustment return shall be
paid at the time the declaration or return is filed in
a manner prescribed by the Commissioner.
(Sec.77[C], NIRC)

Estate Tax

Q: Who shall pay the estate tax due?

A: It is the executor, administrator or any of the

legal heirs, as the case may be, who shall pay the
estate tax. (Sec. 89, NIRC)

Q: When is the Estate Tax paid?

A: At the time the return is filed and before delivery

to any heir or beneficiary, of his distributive share
of the estate. (Sec.91 [A], NIRC)

Note: Philippines implement the

system.

Pay as you file

Q: May the period of payment of estate tax be

extended?

A: Yes. An extension for the payment of the estate

tax may be granted by the Commissioner on
meritorious cases.

Q: What is the period of extension?

A:
1. In case of judicial settlement of estate
exceeding five (5) years

not

2. In case of extra judicial settlement of estate

not exceeding two (2) years (Sec.91 [B], NIRC )

Q: What are the effects of granting an extension of

time to pay estate taxes?

A:
1. The amount shall be paid on or before
expiration of the extension and running of
the statute of limitations for assessment
shall be suspended for the period of any
of such extension.
2. The CIR may require a bond not exceeding
double the amount of the tax and with
such sureties as the CIR deems necessary
when the extension of payment is
granted.
3. Any amount paid after the statutory due
date of the tax, but within the extension
period, shall be subject to interest but not
to surcharge. (Sec.91[B], NIRC )

Note: There can be no extension of the period of

payment if there is negligence, intentional disregard of
rules and regulations or fraud.

Q: May estate taxes be paid in installment?

A: Yes. In case the available cash of the estate is not

sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by installment
and a clearance shall be released only with respect
to the property, the corresponding/computed tax
on which has been paid.

Q: Who are the persons liable for the payment of

estate tax?

A: Where there are two or more executors or

administrators, all of them are severally liable for
the payment of the tax.
The primary obligation to pay the estate tax falls
upon the executor or administrator of an estate.
But the heir or beneficiary has subsidiary liability for
the payment of that portion of the estate which his
distributive share bears to the value of the total net
estate. The extent of his liability, however, shall in
no case exceed the value of his share in the
inheritance. (Sec.91[C], NIRC)

Note: The estate tax clearance issued by the

Commissioner or the Revenue District Officer (RDO)
having jurisdiction over the estate, will serve as the
authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or
beneficiary.

Q: What are the rules governing the discharge of

executors and administrators personal liability?

A: If one wants to be relieved from his liability as an

executor or administrator, he must:
1. File a written application to the
Commissioner for the determination of
the amount of the estate tax and further
stating his desire to be absolved or to be
discharged from the liability.

2. The Commissioner must notify the

executor or administrator

a. If there has been a Return filed - within

one (1) year after the return is filed

b. If Return has not been filed - within one

(1) year after the making of such application

But not after the expiration of the period

prescribed for the assessment of the tax in Section
203.

3. The executor or administrator, upon

payment of the amount of which he is
notified, shall be discharged from
personal liability for any deficiency in the
tax thereafter found to be due and shall
be entitled to a receipt or writing showing
such discharge. (Sec.92, NIRC)

Note: The one year period shall be counted from the

filing of the written application.

Q: What is meant by deficiency assessment?

A: The term deficiency means

1. The amount by which the tax imposed by
this Chapter exceeds the amount shown
as the tax by the executor, administrator
or any of the heirs upon his return; but
the amounts so shown on the return shall
first be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency and
decreased by the amount previously
abated, refunded or otherwise repaid in
respect of such tax; or
2. If no amount is shown as the tax by the
executor, administrator or any of the
heirs upon his return, or if no return is
made by the executor, administrator, or
any heir, then the amount by which the
tax exceeds the amounts previously
assessed (or collected without
assessment) as a deficiency; but such
amounts previously assessed or collected
without assessment shall first be
decreased by the amounts previously
abated, refunded or otherwise repaid in
respect of such tax. (Sec.93, NIRC)

Note: Deficiency occurs when, one files a return and

pay the tax but the tax paid is less than the amount of
tax due, or if a return is filed but the taxpayer did not

pay the tax, or when one did not file the return nor
paid the tax.

Q: May there be delivery of distributable share

even before payment of estate tax?

A: No. Under the Tax Code, no judge shall authorize

the executor or judicial administrator to deliver a
distributive share to any party interested in the
estate unless a certification from the Commissioner
that the estate tax has been paid is shown. (Sec. 94,
NIRC)

Note: There shall not be transferred to any new owner

in the books of any corporation, sociedad anonima,
partnership, business, or industry organized or
established in the Philippines any share, obligation,
bond or right by way of gift inter vivos or mortis causa,
legacy or inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title and due
thereon have been paid is shown. (Sec. 97, NIRC)

Q: What are the instances where a Certificate of

Payment from the Commissioner is required?

A: The following are instances when a Certificate of

Payment of Tax from the Commissioner is required:
1. Before a judge shall authorize the
executor or judicial administrator to
deliver a distributive share to any party
interested in the estate;
2. Before the Register of Deeds shall
register in the Registry of Property any
document transferring real property or
real rights therein or any chattel
mortgage, by way of gifts inter vivos or
mortis causa, legacy or inheritance; (Sec.
95, NIRC)
3. When a lawyer, by reason of his official
duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation inter
vivos or mortis causa, legacy or
inheritance; (Sec. 95, NIRC)
4. When a notary public, by reason of his
official duties, intervenes in the
preparation or acknowledgment of
documents regarding partition or disposal
of donation inter vivos or mortis causa,

legacy or inheritance; (Sec. 95, NIRC)

5. When a government officer, by reason of
his official duties, intervenes in the
preparation or acknowledgment of
documents regarding partition or disposal
of donation inter vivos or mortis causa,
legacy or inheritance; (Sec. 95, NIRC)
6. Before a debtor of the deceased pay his
debts to the heirs, legatee, executor or
administrator of his creditor; (Sec. 95,
NIRC)
7. Before a transfer to any new owner in the
books of any corporation, sociedad
anonima, partnership, business, or
industry organized or established in the
Philippines any share, obligation, bond or
right by way of gift inter vivos or mortis
causa, legacy or inheritance;
8. Before a bank, which has knowledge of
the death of a person who maintained a
bank deposit account alone, or jointly
with another, shall allow any withdrawal

from the said deposit account. (Sec. 97,

NIRC)

Q: What is the rule on restitution of tax upon

satisfaction of outstanding obligations?

A: If after the payment of the estate tax, new

obligations of the decedent shall appear, and the
persons interested shall have satisfied them by
order of the court, they shall have a right to the
restitution of the proportional part of the tax paid.

Donor s Tax

Q: Who are required to pay donor s tax?

A:
1. Resident Citizen (Sec.101 [A], NIRC)
2. Resident Alien (Sec.101 [A], NIRC)
3. Domestic Corporation (Sec.101 [A], NIRC
and PD 1457)
4. Non-Resident Corporation (Sec.101 [B],
NIRC and Sec.86 [A], NIRC)
5. Domestic Alien (Sec.101 [B], NIRC)
6. Foreign Corporation (Sec.101 [B], NIRC)

Note: Domestic and foreign corporation are subject

only to donor s tax and not to estate tax because it is
not capable of death but may enter into contract of
donation.

Q: What is the time of payment of donor s tax?

A: Donor s tax is paid at the time the return is filed

since the Philippine Tax system observes the Pay
as you file system.

Q: Where is the donor s tax paid?

A: Donor s tax is paid with the

1. Authorized agent bank, Revenue district
officer, Revenue Collection Officer, or
duly authorized treasurer of the City or
municipality where the donor was
domiciled at the time of the transfer;
2. If there is no legal residence in the
Philippines, with the office of the
Commissioner;
3. For gifts made by non-residents, with the
Phil embassy or Consulate in the country
where he is domiciled at the time of the
transfer or directly with the office of the
Commissioner.

Value Added Tax

Q: How is VAT paid?

A: Every person liable to pay VAT, upon filing a

quarterly return of the amount of his gross sales or
receipts within 25 days following the close of each
taxable quarter, shall pay the same. However, a
VAT-registered person shall pay the VAT on a
monthly basis.

Any person, whose registration has been cancelled,

shall file a return and pay the tax due within 25
days from the date of cancellation of registration;
Provided, that only one consolidated return shall be
filed by the taxpayer for his principal place of
business or head and all his branches. (Sec. 114[A],
NIRC)

Q: Where must the return be filed?

A: Except as the Commissioner otherwise permits,

the tax shall be paid to the authorized agent bank,
revenue collection officer or duly authorized city or

municipal treasurer in the Philippines located

within the revenue district where the taxpayer is
registered or required to register. (Sec. 114 [B],
NIRC)

Q: What is the rule as regards the return covering

withholding of VAT?

A: The government or any of its political

subdivisions, instrumentalities or agencies,
including GOCCs shall, before making payment on
account of each purchase of goods and services
which are subject of VAT in Sections 106 and 108,
deduct and withhold the VAT due at the rate of 5%
of the gross payment thereof; Provided, that the
payment foe lease or use of properties or property
rights to non
resident owners shall be subject to
12% withholding tax at the time of payment. The
payor or person in control of the payment shall be
considered as the withholding agent. (Sec. 114 [C],
NIRC, as amended by RMC 7-2006)

The VAT withheld shall be remitted within 10 days

following the end of the month the withholding was
made. (Sec. 114 [C], NIRC)

TAX REMEDIES UNDER THE NIRC

1. Taxpayer s Remedies
2. Government Remedies

Taxpayer s Remedies

Q: What are the remedies available to the

taxpayer?

A:
1. Administrative
a. Before payment of taxes:
a. Dispute Assessment (Protest)
i. Request for reconsideration
ii. Request for reinvestigation
b. Entering a compromise agreement
b. After payment of taxes:
a. Claim for Tax Refund

2. Judicial
a. Civil
b. Criminal

3. Substantive
a. Question validity of tax statute/
regulation
b. Non-retroactivity of rulings
c. Must be informed of the legal and factual
bases of assessment
d. Preservation of books of accounts and
examination once a year

Q: What is the importance of tax remedies?

A:
1. To the government - For the regular
collection of revenue necessary for the
existence of the government.
2. To the taxpayer - They are safeguards of
the taxpayer s rights against arbitrary
action.

Q: What are the subjects of tax remedies in

internal revenue taxation?

A: They include the action of the BIR where there

may be controversy between the taxpayer and the
State such as:
1. Assessment of internal revenue taxes
2. Collection of internal revenue taxes
3. Refund of internal revenue taxes
4. Imposition of administrative or civil
fines, penalties, interests or
surcharges; promulgation and/or
enforcement of administrative rules
and regulations for the effective and
efficient enforcement of internal
revenue laws
5. Prosecution of criminal violations of
internal revenue laws.

Q: State the No injunction to restrain tax

collection rule.

A:
GR: Under this rule, No court shall have the
authority to grant an injunction to restrain the
collection of any national internal revenue, tax,
fee or charge. (Sec. 219, R.A. 8424)

XPN: The CTA can issue injunction in aid of its

appellate jurisdiction if in its opinion the same
may jeopardize the interest of the government
and/or the taxpayer. In this instance, the court
may require the taxpayer either to deposit the
amount claimed or file a surety bond for not
more than double the amount with the court.
(RA 1125 as amended by RA 9282)

Note: The Lifeblood doctrine requires that the

collection of taxes cannot be enjoined, without
taxation, a government can neither exist nor endure.

Assessment

Q: What is a notice of assessment?

A: It is a written notice to a taxpayer to the effect

that the amount stated therein is due as tax and
containing a demand for the payment. It is a finding
by the taxing agency that the taxpayer has not paid
his correct taxes.

Note: A notice of assessment contains not only a

computation of tax liabilities but also a demand for the
payment within a prescribed period. It also signals the
time when penalties and interests begin to accrue.

Q: What is the importance of a tax assessment?

A:
TO THE GOVERNMENT
TO THE TAXPAYER
1. In the proper pursuit of
judicial and extrajudicial
remedies to enforce
taxpayer liabilities and
certain matters that relate
to it, such as the imposition
of surcharges and interests;
2. In the application of the
Statute of Limitations;
3. In the establishment of tax
liens; and
4. In estimating the revenues
that may be collected by the
government.

1. To inform the
taxpayer of his
liabilities;
2. To determine
the period
within which to
protest.
3. To determine
prescription of
government
claim.

Q: What is the nature of an assessment?

A: It is merely a notice to the effect that the amount

stated therein is due as tax and containing a
demand for the payment. (Alhambra Cigar Mfg. Co.
v. CIR, GR L-23226, Nov. 28, 1967)

Q: Who has the burden of proof in pre-assessment

proceedings?

A: The burden of proof is on the taxpayer for there

is a presumption of correctness on the part of the
CIR. Otherwise, the finding of the CIR will be
conclusive and the CIR will assess the taxpayer. If
the taxpayer does not controvert, such finding is
conclusive, even if the CIR is wrong.

Q: What are the principles governing tax

assessments?

A: PAD3
1. Assessments:
a. Prima facie presumed correct and
made in good faith;
b. Should be based on Actual facts;
(estimates can also be a basis given
that it is not arrived at arbitrarily or
capriciously)
c. Discretionary on the part of the
Commissioner;
d. Must be DIrected to the right party.
2. The authority vested in the Commissioner
to assess taxes may be Delegated

Q: Is the assessment made by the CIR subject to

judicial review?

A: No, for such power is discretionary. What may

be the subject of a judicial review is the decision of
the CIR on the protest against the assessment, not
the assessment itself.

Q: Are taxes self-assessing?

A:
GR: Taxes are generally self-assessing and do not
require the issuance of an assessment notice in
order to establish the tax liability of a taxpayer.

XPNs:
1. Improperly Accumulated Earnings Tax
(Sec. 29, NIRC)
2. When the taxable period of a taxpayer is
terminated (Sec. 6 [D], NIRC)
3. In case of deficiency tax liability arising
from a tax audit conducted by the BIR
(Sec. 56 [B], NIRC)
4. Tax lien (Sec. 219, NIRC)
5. Dissolving corporation (Sec. 52 [c], NIRC)

Q: What are the different ways of paying taxes?

A:
1. Pay-as-you-file system
Income for
individuals and corporation shall be paid
by the person subject thereto at the time
the return is filed. (Sec. 56, NIRC)

2. Installment payment When income tax

due is in excess of P2,000 and the
taxpayer is not a corporation, he may
elect to pay the tax in two equal
installments. First installment is when the
return is filed and the second installment
is on or before July 15 following the close
of the calendar year. (Sec. 56 A [2], NIRC)

Concept of Assessment

Requisites for Valid Assessment

Q: What are the requisites for a valid assessment?

A: The assessment must:

1. Be in writing and signed by the BIR;
2. Contain the law and the facts on which
the assessment is made; and
3. Contain a demand for payment within the
prescribed period. (Sec. 228, NIRC)

Constructive Method of Income Determination

Q: If the taxpayer s record or methods of

accounting are not reflective of his true income,
what methods may be utilized by the CIR to
determine the correct taxable income of the
taxpayer?

A: NCPBUTTS
1. Net worth method
2. Cash expenditure method
3. Percentage method
4. Bank deposit method
5. Unit and value method
6. Third party information or access to
records method
7. Surveillance and assessment method
8. Such methods as in the opinion of the BIR
Commissioner clearly reflect the income
(1969 Bar Question)

Q: A Co., a DC, is a big manufacturer of consumer

goods and has several suppliers of raw materials.
The BIR suspects that some of the suppliers are
not properly reporting their income on their sales
to A Co. The CIR therefore: 1) Issued an access

letter to A Co. to furnish the BIR information on

sales and payments to its suppliers. 2) Issued an
access letter to X Bank to furnish the BIR on
deposits of some suppliers of A Co. on the alleged
ground that the suppliers are committing tax
evasion. A Co., X Bank and the suppliers have not
been issued by the BIR letter of authority to
examine. A Co. and X Bank believe that the BIR is
on a "fishing expedition" and come to you for
counsel. What is your advice?

A: I will advise A Co. and X Bank that the BIR is

justified only in getting information from the
former but not from the latter. The BIR is
authorized to obtain information from other
persons other than those whose internal revenue
tax liability is subject to audit or investigation.
However, this power shall not be construed as
granting the CIR the authority to inquire into bank
deposits. (Sec. 5, NIRC) (1999 Bar Question)

Q: BIR assessed the taxpayer for alleged deficiency

taxes. The assessment was based on photocopies
of 77 Consumption Entries furnished by an
informer, the taxpayer understated its
importations. However, the BIR failed to secure
certified true copies of the subject Consumption
Entries from the Bureau of Customs since,
according to the custodian, the originals had been
eaten by termites. Can the BIR base its assessment
on mere photocopies of records/documents?

A: No, mere photocopies of the Consumption

Entries have no probative weight if offered as proof
of the contents thereof. While it is true that under
the Tax Code, the BIR can assess taxpayers based
on the best evidence obtainable and that tax
assessments are presumed correct and made in
good faith, it is elementary that the assessment
must be based on actual facts. The best evidence
obtainable provided under the Tax Code does not
include mere photocopies of records or documents.
The presumption of the correctness of an
assessment, being a mere presumption, cannot be
made to rest on another presumption. (CIR v.
Hantex Trading Co., Inc., GR 136975, Mar. 31, 2005)

Q: B Corp. received an Audit Notice authorizing

the examination of its books of accounts and other
accounting records for all internal revenue taxes
for the period Jan. 31, 1998 to Dec. 31, 1998.

Under the aforesaid Audit Notice, B Corp. was

assessed deficiency VAT on payments made in
1997 to a nonresident foreign corporation. B Corp.
protested the assessment alleging, among others,
that the audit conducted regarding the 1997
royalty payment is beyond the authority of the
auditing officers under the Audit Notice and the
right to assess VAT on such royalty payment has
prescribed. Is the assessment made on the royalty
payment outside the scope of the Audit Notice and
has the right of the government to assess
deficiency VAT thereon prescribed?

A: B Corp. paid royalties to a NRFC in 1997 but

failed to pay VAT thereon. Hence, B Corp s VAT
liability is incontrovertible. Notwithstanding the
absence of an Audit Notice to conduct a tax
investigation for the year 1997, the CTA ruled, on
the basis of Sec. 6 (A) and (B), NIRC, that the power
of the CIR to assess B Corp. deficiency VAT is valid.
The CTA further ruled that the power of the
government to assess deficiency VAT has not
prescribed since the royalty payment was not
reflected in the 1997 and 1998 VAT returns of B
Corp. For filing false returns, the ten year
prescriptive period for the assessment of deficiency
taxes applies. (Business One, Inc. v. CIR, CTA Case
No. 6832, Oct. 7, 2008)

Inventory Method for Income Determination

Q: What are the Inventory methods for income

determination?

A: The International Accounting Standard

enumerated the following:
1.
2.
3.
4.

Last In First Out (LIFO)

First In
First Out (FIFO)
Weighted Average
Specific identification

Q: What is LIFO and FIFO?

A: A method of assigning costs to both inventory

and cost of goods sold. With regard to LIFO the

assumption is that the most recent inventory is the
one sold first as compared to FIFO wherein the
inventory items are sold in the order they are
acquired.

Q: What is Weighted Average?

A: A method of assigning cost which requires that

we compute the weighted average cost per unit at
the time of each sale, equals the cost of goods
available for sale divided by the units available.
Thus, the cost of goods sold would be dependent
on the average acquisition cost of the inventory
currently available when a sale is done.

Q: What is Specific Identification?

A: A meticulous method wherein each item in

inventory can be identified with a specific purchase

and invoice, when each item is sold the sales record

should also contain the same. Thus the cost of
goods sold would depend on which item was sold
for that particular sale.

Jeopardy Assessment

Q: What are the different kinds of assessments

and what is jeopardy assessment?

A:
1. Pre-Assessment
informs the taxpayer
of the findings of the examiner who
recommends a deficiency assessment.
The taxpayer is usually given 10 days
from notice within which to explain his
side.

2. Self-Assessment one in which the tax

is assessed by the taxpayer himself.

3. Official Assessment
issued by the BIR
in case the taxpayer fails to respond to
the pre-assessment, or his explanation
is not satisfactory to the CIR.

4. Illegal and Void Assessment

tax
assessor has no power to assess at all.

5. Erroneous Assessment
assessor has
power to assess but errs in the exercise
thereof.

6. Jeopardy Assessment a delinquency

tax assessment made without the

benefit of a complete or partial

investigation by a belief that the
assessment and collection of a
deficiency tax will be jeopardized by
delay caused by the taxpayer s failure
to:

a. Comply with audit and investigation

requirements to present his books of
accounts and/or pertinent records,
or
b. Substantiate all or any of the
deductions, exemptions or credits
claimed in his return.

Note: This is issued when the revenue

officer finds himself without enough time to
conduct an appropriate or thorough
examination in view of the impending
expiration of the prescriptive period for
assessment. To prevent the issuance of a
jeopardy assessment, the taxpayer may be
required to execute a waiver of the statute
of limitations.

Tax Delinquency and Tax Deficiency

Q: What is Delinquency Tax and Deficiency Tax?

A:
1. Delinquency Tax a taxpayer is considered
delinquent in the payment of taxes when:
a. Self-assessed tax per return filed by the
taxpayer on the prescribed date was
not paid at all or only partially paid; or
b. Deficiency tax assessed by the BIR
becomes final and executory.

2. Deficiency Tax
a. The amount by which the tax imposed

by law as determined by the CIR or his

authorized representative exceeds the
amount shown as tax by the taxpayer
upon his return; or
b. If no amount is shown as tax by the
taxpayer upon his return is made by
the taxpayer, then the amount by
which the tax as determined by the CIR
or his authorized representative
exceeds the amounts previously
assessed or collected without
assessment as deficiency.

Q: Distinguish Delinquency Tax from Deficiency

Tax?

A:
Delinquency Tax
Deficiency Tax
Collection
Can immediately be
collected
administratively
through the issuance
of a warrant of
distraint and levy,
and/or judicial action
Can be collected through
administrative and/or judicial
remedies but has to go
through the process of filling
the protest by the taxpayer
against the assessment and
the denial of such protest by
the BIR
Civil Action
The filing of a civil
action for the
collection of the
delinquent tax in the
ordinary court is a
proper remedy
The filling of a civil action at
the ordinary court for
collection during the

pendency of protest may be

the subject of a motion to
dismiss. In addition to a
motion to dismiss, the
taxpayer must file a petition
for review with the CTA to toll
the running of the
prescriptive period
Penalties
A delinquent tax is
subject to
A deficiency tax is generally
not subject to the 25%

administrative
penalties such as 25%
surcharge, interest,
and compromise
penalty
surcharge, although subject
to interest and compromise
penalty

Power of the Commissioner to Make Assessments

and Prescribe Additional Requirements for Tax
Administration and Enforcement

Q: What are the powers of the Commissioner in

the assessment of taxes?

A: The CIR or his duly authorized representative is

authorized to use the following powers: (Sec. 6,
NIRC)
1. Examination of return and determination
of tax due
2. Use of the best evidence available
3. Authority to conduct inventory taking,
surveillance and prescribe gross sales and
receipts if there is reason to believe that
the taxpayer is not declaring his correct
income, sales or receipts for internal
revenue purposes
4. Authority to terminate taxable period in
the following instances:
a. Taxpayer is retiring from business
subject to tax;
b. Taxpayer is intending to leave the
Philippines or to remove his property
therefrom or to hide or conceal his
property and
c. Taxpayer is performing any act
tending to obstruct the proceedings
for the collection of taxes.
5. Authority to prescribe real property
values
6. Authority to inquire into bank deposits
accounts in the following instances:
a. A decedent to determine his gross
estate;

b. Any taxpayter who has filed an

application for compromise of his tax
liability by reason of financial
incapability to pay;
c. A specific taxpayer/s is subject of a
request for the supply of tax
information a foreign tax authority
pursuant to an intentional
convention or agreement on tax
matters to which the Philippines is a
signatory or a party of. Provided that
the requesting foreign tax authority
is able to demonstrate the
foreseeable relevance of certain
information required to be given to
the request. (Sec. 3 & 8, RA 10021)
d. Where the taxpayer has signed a
waiver authorizing the Commissioner
or his duly authorized representative
to inquire into the bank deposits.
7. Authority to accredit and register tax
agents
8. Authority to prescribe additional
procedural or documentary requirements.

Q: What is the Best Evidence Obtainable?

A: Any data, record, papers, documents or any

evidence gathered by internal revenue officers from
government offices/agencies, corporations,
employees, clients, patients, tenants, lessees,
vendees and from all other sources with whom the
taxpayer had previous transactions or from whom
he received any income.

Q: When may the CIR assess the tax on best

obtainable evidence?

A: FINE
1. When a return is required by law as a
basis for assessment of internal revenue
tax shall not be forthcoming within the
time fixed by law or regulation (No return
filed); or
2. Any return which is False, Incomplete or
Erroneous. (Sec. 6, NIRC)

Q: Does the power of the CIR to inquire into bank

deposits of a taxpayer conflict with RA 1405,
Secrecy of Bank Deposits Law?

A: The limited power of the CIR does not conflict

with RA 1405 because the provisions of the Tax
Code granting this power is an exception to the
Secrecy of Bank Deposits Law as embodied in a
later legislation.

Furthermore, in case a taxpayer applies for an

application to compromise the payment of his tax
liabilities on his claim that his financial position
demonstrates a clear inability to pay the tax
assessed, his application shall not be considered
unless and until he waives in writing his privilege
under RA 1405, and such waiver shall constitute the
authority of the CIR to inquire into the bank
deposits of the taxpayer. (1998 Bar Question)

Power of the Commissioner to Obtain

Information, and to Summon/ Examine,
and Take Testimony of Persons

Q: What is the power of the CIR to obtain

information, and to summon, examine and take
testimony of persons?

A: This power is for ascertaining the correctness of

any return, or in making a return when none has
been made, or in determining the liability of any
person for any internal revenue tax, or in collecting
any such liability, or in evaluating tax compliance,
the Commissioner is authorized:

1. To examine any book, paper, record, or

other data which may be relevant or
material to such inquiry;
2. To obtain on a regular basis from any
person other than the person whose
internal revenue tax liability is subject to
audit or investigation, or from any office
or officer of the national and local
governments, government agencies and
instrumentalities, including the BSP and
GOCCs, any information such as, but not
limited to, costs and volume of
production, receipts or sales and gross
incomes of taxpayers, and the names,
addresses, and financial statements of
corporations, mutual fund companies,
insurance companies, regional operating
headquarters of multinational companies,
joint accounts, associations, joint
ventures of consortia and registered
partnerships, and their members;
3. To summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person
having possession, custody, or care of the
books of accounts and other accounting
records containing entries relating to the
business of the person liable for tax, or
any other person, to appear before the
CIR or his duly authorized representative
at a time and place specified in the
summons and to produce such books,
papers, records, or other data, and to give
testimony;
4. To take such testimony of the person
concerned, under oath, as may be

relevant or material to such inquiry; and

5. To cause revenue officers and employees
to make a canvass from time to time of
any revenue district or region and inquire
after and concerning all persons therein
who may be liable to pay any internal
revenue tax, and all persons owning or
having the care, management or
possession of any object with respect to
which a tax is imposed. (Sec. 5, NIRC)

When is Assessment Made

Q: When is an assessment deemed made?

A: When it is released, mailed or sent by the

collector of internal revenueto the taxpayer within
the three-year or ten-year period, as the case may
be. (CIR v. Pascor, GR 128315, June 29, 1999)

Q: A notice of assessment was mailed within the

period prescribed by law but the same was
received by the taxpayer beyond the period. Was
there a valid assessment?

A: Yes. There was an assessment made within the

period. If the notice is sent through registered mail,
the running of the prescriptive period is stopped .
What matters is the sending of the notice is made
within the period of prescription. It is the sending of
the notice and not the receipt that tolls the
prescriptive period. (Basilan v. CIR, GR L-22492,
Sept. 5, 1967)

Prescriptive Periods

Q: What is the rationale of prescriptive periods?

A: To secure the taxpayers against unreasonable

investigation after the lapse of the period

prescribed. They are beneficial to the government
because tax officers will be obliged to act promptly
in the assessment and collection of the taxes, for
when such period have lapsed their right to assess
and collect would be barred by the statute of
limitations.

Q: State the basic rules on prescription.

A:
1. When the tax law itself is silent on
prescription, the tax is imprescriptible;

2. When no return is required, tax is

imprescriptible and tax may be assessed
at any time as the prescriptive periods
provided in Sec. 203 and 222, NIRC are
not applicable. Remedy of the taxpayer is
to file a return for the prescriptive period
to commence.

Note: Limitation on the right of the

government to assess and collect taxes will

not be presumed in the absence of a clear

legislation to the contrary.

3. Prescription is a matter of defense, and it

must be proved or established by the
party (taxpayer) relying upon it.

4. Defense of prescription is waivable, such

defense is not jurisdictional and must be
raised seasonably, otherwise it is deemed
waived.

5. The law on prescription, being a remedial

measure, should be interpreted liberally
in order to protect the taxpayer.

6. If the last day of the period falls on a

Saturday, a Sunday or a legal holiday in
the place where the Court sits, the time
shall not run until the next working day.
(Sec. 1, Rule 22, Rules of Court)

Note: Assessment and collection by the government of

the tax due must be made within the prescribed period
as provided by the Tax Code; otherwise, the right of
the government to collect will be barred.

Q: How should the prescriptive period be

computed?

A: It is computed based on the Administrative Code.

Sec. 31 of the Administrative Code of 1987 provides
that a year shall be understood to be 12 calendar
months. Both Article 13 of the Civil Code and Sec.
31 of the Administrative Code of 1987 deal with the
same subject matter
the computation of legal
periods. Under the Civil Code, a year is equivalent
to 365 days whether it be a regular year or a leap
year. Under the Administrative Code of 1987,
however, a year is composed of 12 calendar months
and the number of days is irrelevant. There

obviously exists a manifest incompatibility in the

manner of computing legal periods under the Civil
Code and the Administrative Code of 1987. For this
reason, Sec. 31, Chapter VIII, Book I of the
Administrative Code of 1987, being the more recent
law governs the computation of legal periods. (CIR
v. Primetown Property Group, Inc., GR 162155, Aug.
28, 2007)

Q: Compare Secs. 203 and 222 of the NIRC.

A: Sec. 203 covers tax returns which is neither false

nor fraudulent whereas, Sec. 222 covers:
1. Fraudulent returns,
2. False returns and;
3. Failure to file a return.

Prescriptive Period for Assessment

Q: What are the prescriptive periods for the

assessment of taxes?

A:
1. Where a return was filed:

GR: The period for assessment is within 3

years after the date the return was due or
if the return is filed after the due date
prescription will start on the date the
return was filed.

XPNS:
a. If there is failure to file the required
return, the period is within 10 years
after the date of discovery of the
omission to file the return.

Note: Date of discovery must be made

within the three-year period following
the general rule.

b. If the return is filed but it is false or

fraudulent and made with intent to
evade the tax, the period is 10 years
from the date of discovery of the
falsity or fraud.

Note: Nothing in Sec. 222 (A) shall be

construed to authorize the examination
and investigation or inquiry into any tax
return filed in accordance with the
provisions of any tax amnesty law or
decree.

c. Where the CIR and taxpayer, before

the expiration of the 3-year period
have agreed in writing to the
extension of the period, the period
so agreed upon may thereafter be
extended by subsequent agreements
in writing made before the
expiration of the period previously
agreed upon.

d. Where there is a written waiver or

renunciation of the original 3-year
limitation signed by the taxpayer.

Note: Requests for reconsideration of tax

assessments, as required by the BIR, must be
accompanied by a waiver of statute of limitations
accomplished by the taxpayer.

2. The return was amended substantially

The prescriptive period shall be counted
from the filing of the amended return.

Q: When is a return considered filed for purposes

of prescription?

A: When the return is valid and appropriate.

1. Valid When it has complied substantially
with the requirements of law.
2. Appropriate
When it is a return for the
particular tax required by law.

Q: What is the effect of filing a defective return?

A: If the return was defective, it is as if no return

was filed. The corollary prescription will be 10 years
from and after the discovery of the failure or
omission and not the 3 year prescriptive period.
There is an omission when the taxpayer failed to file
a return for the particular tax required by law.
(Butuan Sawmill v. CTA, GR L-20601, Feb. 28, 1966)

False, Fraudulent and Non-filing of Returns

Q: What is the prescriptive period where the

return was false, fraudulent or there was no return
filed?

A: The prescription period is 10 years from the

discovery of the falsity, fraud or from the omission
to file the return. (Sec. 222, NIRC)

Q: When is a return considered fraudulent?

A: Fraud is never presumed and the circumstances

constituting it must be alleged and proved to exist

by clear and convincing evidence. It may be
established by the:
1. Intentional and substantial understatement
of tax liability by the taxpayer;
2. Intentional and substantial overstatement of
deductions of exemptions; and/or
3. Recurrence of the above circumstances

Q: When is a return considered false?

A: When there is a deviation from the truth due to

mistake, carelessness or ignorance.

Q: Distinguish a false return from a fraudulent

return.

A:
False Return
Fraudulent Return
A deviation from the
truth or fact whether
intentional or not
Intentional and deceitful with
the sole aim of evading the
correct tax due

(Aznar v. CIR, GR L-20569, Aug. 23, 1974)

Q: When is an amendment considered substantial?

A:
1. There is
30% of that
receipts or
2. There is
deductions)

under declaration (exceeding

declared) of taxable sales,
income; or
overstatement (exceeding 30% of
(Sec. 248, NIRC)

Q: When does the taxpayer s liability attach?

A: Only after receipt of the letter-assessment was

coupled with the willful refusal to pay the taxes due
within the allotted period.

Q: Is it necessary that the notice of assessment be

received by the taxpayer within the prescriptive
period?

A: No, notice of the assessment must be released,

mailed or sent to the taxpayer within the 3 year
period. It is not required that the notice be received
by the taxpayer within the prescribed period, but
the sending of the notice must clearly be proven.
(Basilan Estate, Inc. v. CIR, GR L-22492, Sept. 5,
1967)

Q: A Co., a DC filed its 1995 ITR on Apr. 15, 1996

showing a net loss. On Nov. 10, 1996, it amended
its 1995 ITR to show more losses. After an
investigation, the BIR disallowed certain
deductions claimed by A Co., putting A Co., in a
net income position. As a result, on Aug. 5, 1999,
the BIR issued a deficiency income assessment
against A Co. A Co., protested the assessment on
the ground that it has prescribed.

A: The right of the BIR to issue an assessment has

not yet prescribed since the return was amended.
The rule is that internal revenue taxes shall be
assessed within 3 years after the last day prescribed
by law for the filing of the return. (Sec. 203, NIRC)
However if the return originally filed is amended
substantially, the counting of the 3-year period
starts from the date the amended return was filed.
There is substantial amendment in this case
because a new return was filed declaring more
losses, which can only be done either in reducing
gross income or in increasing the items of
deduction. Thus, the period within which to assess
shall prescribe on Nov. 10, 1999. (1999 Bar
Question)

Q: Mr. Reyes, a Filipino citizen engaged in the real

estate business, filed his 2004 ITR on Mar. 30,

2005. On Dec. 30, 2005, he left the Phil. as an

immigrant to join his family in Canada. After

investigation of said return, the BIR issued a notice
of deficiency income tax assessment on Apr. 15,
2008. Mr. Reyes returned to the Phil. as a
balikbayan on Dec. 8, 2008. Finding his name to be
in the list of delinquent taxpayers, he filed a
protest against the assessment on the ground that
he did not receive a notice of assessment and the
assessment had prescribed. Will the protest
prosper?

A: No, the assessment has not yet prescribed since

the BIR has a period of 3 years from the last day
prescribed by law for the filing of the return. The
return was filed on Mar. 30, 2005 with a due date
of Apr. 15, 2005. The assessment issued on Apr. 15,
2008 is within the 3 year prescriptive period. (2000
Bar Question)

Q: Mr. Sebastian is a Filipino seaman employed by

a Norwegian company which is engaged
exclusively in international shipping. He and his
wife, who manages their business, filed a joint ITR
for 1997 on Mar. 15, 1998. After an audit of the
return, the BIR issued on Apr. 20, 2001 a deficiency
income tax assessment for the sum of P250,000
inclusive of interest and penalty. For failure of Mr.
and Mrs. Sebastian to pay the tax within the
period stated in the notice of assessment, the BIR
issued on Aug. 19, 2001 warrants of distraint and
levy to enforce collection of the tax.

If you are the lawyer of Mr. and Mrs. Sebastian,

what possible defenses will you raise in behalf of
your clients against the action of the BIR in
enforcing collection of the tax?

A: I will raise the defense of prescription. The right

of the BIR to assess prescribes after three years
counted from the last day prescribed by law for the
filing of the income tax returns when the said
return is filed on time. (Sec. 203, NIRC) The last day
for filing the 1997 income tax return is Apr. 15,
1998. Since the assessment was issued only on Apr.
20, 2001, the BIR's right to assess has already
prescribed. (2002 Bar Question)

Suspension of Running of Statute of Limitations

Q: What are the grounds for suspension of the

prescriptive periods?

A: LOW-PARA
1. When taxpayer cannot be Located in the
address given by him in the return, unless
he informs the CIR of any change in his
address thru a written notice to the BIR;

2. When the taxpayer is Out of the

Philippines (Sec. 223, NIRC)

3. When the Warrant of distraint and levy is

duly served upon the taxpayer, his
authorized representative or a member of
his household with sufficient discretion
and no property is located (proper only
for suspension of the period to collect);

4. Where the CIR is prohibited from making

the assessment or beginning distraint or
levy or a proceeding in court for 60 days
thereafter, such as where there is a
Pending petition for review in the CTA
from the decision on the protested
assessment (Republic v. Ker & Co., GR L21609);

5. Where CIR and the taxpayer Agreed in

writing for the extension of the
assessment, the tax may be assessed
within the period so agreed upon (Sec.
222 [b], NIRC);

6. When the taxpayer Requests for

reinvestigation which is granted by the
Commissioner (Collector v. Suyoc
Consolidated Mining Co., GR L-11527,

Nov. 25, 1958);

Note: A request for reconsideration alone does

not suspend the period to assess/collect.

7. When there is an Answer filed by the BIR

to the petition for review in the CTA
(Hermanos v. CIR, GR. No. L-24972. Sept.
30, 1969) where the court justified this by
saying that in the answer filed by the BIR,
it prayed for the collection of taxes.

Waiver of Statute of Limitations..

Q: What is a waiver of statute of limitations?

A: It is an agreement between the taxpayer and the

BIR that a period to issue an assessment and collect
taxes due is extended to a date certain. (Philippine
Journalists, Inc. v. CIR, GR 162852, Dec. 16, 2004)

Q: What is the nature of such waiver?

A: It is to a certain extent a derogation of the

taxpayer s right to security against prolonged and
unscrupulous investigations and must be carefully
and strictly construed.

Q: What are the requisites of an agreement

waiving the statute of limitations?

A:
1. Entered before the expiration of the 3
year period for assessment of the tax;
2. In writing;
3. Signed by the taxpayer;
4. Must specify a definite date agreed upon
between the parties within which to
assess and collect taxes;
5. Signed and accepted by the CIR or his duly
authorized representative; and
6. Date of acceptance must be indicated.
(RMC 06-05)

*See discussion on General provision on Addition to

the Tax

Assessment Process

1. Issuance of a letter of authority

2. Audit stage
3. Issuance of notice of informal conference
4. Informal conference
5. Issuance of preliminary assessment notice
6. Issuance of formal letter of demand and
assessment notice

Issuance of a Letter Of Authority

Q: What is a Letter of Authority (LA)?

A: It is an official document that empowers a

Revenue Officer (RO) to examine and scrutinize a

taxpayer s books of accounts and other accounting
records, in order to determine the taxpayer s
correct internal revenue tax liabilities.

Q: What are the cases which need not be covered

by a valid LA?

A:
1. Cases involving civil or criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement
Services; and
2. Policy cases under audit by the Special
Teams in the National Office (RMO 36-99)

Q: When must a LA be served?

A: It must be served to the taxpayer within 30 days

from its date of issuance; otherwise, it shall become
null and void. The taxpayer shall then have the right
to refuse the service of this LA, unless the LA is
revalidated.

Q: How is LA revalidated? How often can it be

revalidated?

A: Revalidated through the issuance of a new LA. It

can be revalidated only once, if issued by the
Regional Director; twice, if issued by the CIR. The
suspended LA(s) must be attached to the new
issued LA. (RMO 38-88)

Audit Stage.

Q: Within what period should a RO conduct an

audit?

A: A RO is allowed only 120 days to conduct the

audit and submit the required report of
investigation from the date of receipt of a LA by the
taxpayer. If the RO is unable to submit his final
report of investigation within the 120-day period,
he must then submit a Progress Report to his Head
of Office, and surrender the LA for revalidation.

Q: How many times can a taxpayer be subjected to

examination and inspection for the same taxable
year?

A:
GR: Only once per taxable year.

XPNs: FRC3
1. When the CIR determines that Fraud,
irregularities, or mistakes were
committed by the taxpayer;
2. When the taxpayer himself requests for
the Re-investigation or re-examination of
his books of accounts and it was granted
by the commissioner;
3. When there is a need to verify the
taxpayer s Compliance with withholding
and other internal revenue taxes as
prescribed in a Revenue Memorandum
Order issued by the Commissioner;
4. When the taxpayer s Capital gains tax
liabilities must be verified; and
5. When the Commissioner chooses to
exercise his power to obtain information
relative to the examination of other
taxpayers (Secs. 5 and 235, NIRC)

Issuance of Notice of Informal Conference.

Q: What is a Notice for Informal Conference (NIC)?

A: It is a written notice informing a taxpayer that

the findings of the audit conducted on his books of
accounts and accounting records indicate that
additional taxes or deficiency assessments have to
be paid. If, after the culmination of an audit, a RO
recommends the imposition of deficiency
assessments, this is communicated by the Bureau
to the taxpayer concerned during an informal
conference called for this purpose.

Q: Within how many days must the taxpayer

respond to the NIC?

A: The taxpayer have 15 days from the date of his

receipt to explain his side.

Q: What is the effect if taxpayer fails to respond to

the NIC?

A: If the taxpayer fails to respond within 15 days

from date of receipt of the NIC, he shall be
considered in default, in which case, the Revenue
District Officer or the Chief of the Special
Investigation Division of the Revenue Regional
Office, or the Chief of Division in the National
Office, as the case may be, shall endorse the case
with the least possible delay to the Assessment
Division of the Revenue Regional Office or to the
CIR or his duly authorized representative, as the
case may be, for appropriate review and issuance of
a deficiency tax assessment, if warranted. (Sec
3.1.1, RR 12-99)

Q: What are the instances where NIC may be

dispensed with?

A: NIC can be dispensed with: MEDEC

1. When the finding for any deficiency tax is
the result of Mathematical error in the
computation of the tax appearing on the
face of the tax return filed by the
taxpayer; or
2. When the Excise tax due on excisable
articles has not been paid; or

3. When a Discrepancy has been determined

between the tax withheld and the
amount actually remitted by the
withholding agent; or
4. When an article locally purchased or
imported by an Exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare parts,
has been sold, traded or transferred to
non-exempt persons; or
5. When a taxpayer who opted to claim a
refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have Carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year.
(Sec 3.1.3, RR 12-99)

Informal Conference

Q: What is the purpose of Informal Conference?

A: It is to afford the taxpayer the opportunity to

present his case.

Q: What matters are taken up during the Informal

Conference?

A:
1. Discussion on the merits of the
assessment
2. Attempt of the taxpayer to convince the
examiner to conduct a reinvestigation
and/or re-examination
3. Evaluate if submission of the waiver of
the statute of limitations is
necessarybecause evaluation may extend
beyond 3 years
4. Taxpayer to advise the examiner if
position paper will be submitted

Issuance of Preliminary Assessment Notice

Q: What is a Pre-Assessment Notice (PAN)?

A: It is a communication issued by the Regional

Assessment Division, or any other concerned BIR
Office, informing a taxpayer who has been audited
of the findings of the RO, following the review of
these findings.

Q: What are the requirements of a valid PAN?

A:
1. In writing; and
2. Should inform the taxpayer of the law and
the facts on which the assessment is
made (Sec. 228, NIRC)
Note: This is to give the taxpayer the opportunity to
refute the findings of the examiner and give a more
accurate and detailed explanation regarding the
assessments. The absence of any of the requirements
shall render the assessment void.

Q: Within what period must the taxpayer respond

to PAN?

A: If the taxpayer disagrees with the findings stated

in the PAN, he have 15 days from receipt of the
PAN, to file a written reply contesting the proposed
assessment. (Sec. 3.1.2, RR 12-99)

Q: What is the effect of taxpayer s failure to

respond within 15 days?

A: The taxpayer shall be considered in default, in

which case a formal letter of demand and
assessment notice shall be issued by the BIR. (Sec.
3.1.2, RR 12-99)

Exceptions to Issuance of PAN

Q: Under what instances is PAN no longer

required?

A: Same as the instances where NIC may be

dispensed with, to wit: MEDEC
1. When the finding for any deficiency tax is
the result of Mathematical error in the
computation of the tax appearing on the
face of the tax return filed by the
taxpayer; or
2. When the Excise tax due on excisable
articles has not been paid; or
3. When a Discrepancy has been determined
between the tax withheld and the
amount actually remitted by the
withholding agent; or
4. When an article locally purchased or
imported by an Exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare parts,
has been sold, traded or transferred to
non-exempt persons; or
5. When a taxpayer who opted to claim a
refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have Carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year.
(Sec 3.1.3, RR 12-99)

Q: In the investigation of the withholding tax

returns of AZ Medina Security Agency (AZ) for the
taxable years 1997 and 1998, a discrepancy
between the taxes withheld from its employees
and the amounts actually remitted to the
government was found. Accordingly, before the
period of prescription commenced to run, the BIR
issued an assessment and a demand letter calling
for the immediate payment of the deficiency
withholding taxes in the total amount of
P250,000.00. Counsel for AZ protested the
assessment for being null and void on the ground
that no pre-assessment notice had been issued. Is
the contention of the counsel tenable?

A: No, the contention of the counsel is untenable.

Sec. 228, NIRC expressly provides that no preassessment notice is required when a discrepancy
has been determined between the tax withheld and
the amount actually remitted by the withholding
agent. Since the amount assessed relates to
deficiency withholding taxes, the BIR is correct in
issuing the assessment and demand letter calling
for the immediate payment of the deficiency
withholding taxes. (2002 Bar Question)

Reply to PAN

Q: What is a reply?

A: A reply is the answer of the taxpayer in

contesting the findings of the revenue officers
contained in a PAN and must be filed within 15 days
from receipt of the PAN. Failure of the taxpayer to
file a reply would now enable the RO to issue a
FAN. However no liability for additional or
deficiency tax arises from such failure. The tax code
used the term reply to distinguish it from a
protest.

Issuance of Formal Letter of Demand

and Assessment Notice.

Q: What is a Notice of Assessment/Formal Letter

of Demand (FAN)?

A: It is a declaration of deficiency taxes issued to a

taxpayer who fails to respond to a PAN within the
prescribed period of time, or whose reply to the
PAN was found to be without merit.

Q: Who issues the FAN?

A: It shall be issued by the Commissioner or his duly

authorized representative.

Q: In what form shall the FAN be and what should

it contain?

A:
1. In writing; and
2. Shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the FAN

shall be void. (Sec. 228, NIRC; Sec. 3.1.4 RR

12-99)

Q: What does the phrase

228 mean?

in writing under Sec.

A: It does not exclusively mean written words.

Writing consists of letters, word, numbers, or
their equivalent, set down by handwriting,
typewriting, printing, photostating, photographing,
magnetic impulse, mechanical or electronic
recording, or other form of data compilation.
Indubitably, figures are also writings and if the
numerical presentation is understandable enough,
then there is no reason why it should be
automatically rejected as inadequate compliance
with the law. (Sevilla, et. al., v. CIR, CTA Case 6211,
Oct. 4, 2004)

Q: What are the remedies of the taxpayer after the

issuance of a FAN?

A: The taxpayer may protest the assessment within

30 days from receipt otherwise the assessment
becomes final, executory, demandable and not
appealable to the CTA.

Q: Enron, a duly registered Subic Bay Freeport

Zone enterprise received a FAN from the CIR
despite filing its protest letter to the preliminary
five-day letter. Enron filed a Petition for Review
with the CTA since the CIR failed to resolve its
protest against the FAN within the mandated 180day period. Enron alleged that the BIR failed to
provide the legal and factual basis of the
assessment in violation of Sec. 3.1.4, RR 12-99.
Finding for Enron, the CTA held that the FAN sent
to the Company failed to comply with the
requirements of a written notice set by the law as
there was no mention of the applicable law and
facts. The CIR then elevated the case to the SC
claiming that Enron was informed of the legal and
factual bases of the deficiency assessment against
it.

1. Was there a valid assessment?

2. Is the notice requirement satisfied when the

BIR advised the taxpayer s representative of
the tax deficiency during the pre-assessment
stage, and furnished the taxpayer of a copy of
the audit working papers?

A:
1. There was no valid assessment made. The
CIR merely issued a formal assessment and
indicated therein the supposed tax,
surcharge, interest and compromise penalty
due thereon. The ROs in the issuance of the
FAN did not provide Enron with the written
bases of the law and facts on which the
subject assessment is based. The CIR did not
bother to explain how it arrived at such an
assessment. Furthermore, he failed to
mention the specific provision of the Tax
Code or rules and regulations which were
not complied with by Enron.
2. The advice of tax deficiency given to the
taxpayer s employee during the preassessment stage, as well as the preliminary
five-day letter, were not valid substitutes for
the mandatory notice in writing of the legal
and factual bases of the assessment. (CIR v.
Enron Subic Power Corp., GR 166387, Jan.
19, 2009)

Disputed Assessment

Q: When is an assessment considered disputed?

A: When the taxpayer, indicates its protest against

the delinquent assessment of the RO and requests
for reconsideration, through a letter. After the
request is filed and received by the BIR, the
assessment becomes a disputed assessment. (CIR v.
Isabela Cultural Corp., GR 135210, July 11, 2001)

Administrative Decision on a Disputed Assessment

Q: Can a taxpayer go to the CIR when a protest is

denied by the CIR s authorized Representative?

A: Yes, the taxpayer may elevate the protest to the

CIR within 30 days from receipt of the decision for a
request for reconsideration and that his case is
referred to the Bureau s Appellate Division.
Otherwise, it becomes final and appeal to the CTA
may be taken.
Note: The authority to make tax assessments may be
delegated to subordinate officers. Said assessment has
the same force and effect as that issued by the CIR if
not revised or reviewed by the latter. (Oceanic
Network Wireless Inc. V. CIR, GR 148380, Dec. 9, 2005)

Protesting Assessment

Q: What is a protest?

A: It is the act by the taxpayer of questioning the

validity of the imposition of the corresponding
delinquency increments for internal revenue taxes
as shown in the notice of assessment and letter of
demand.

Q: What are the requisites of a protest?

A:
1. In writing;
2. Addressed to the CIR;
3. Accompanied by a waiver of the Statute
of Limitations in favor of the
Government. Without the waiver the
prescriptive period will not be tolled; (BPI
v. CIR, GR 139736, Oct. 17, 2005)
4. State the facts, applicable law, rules and
regulations or jurisprudence on which
the protest is based otherwise the
protest would be void; and
5. Must contain the following:
a. Name of the taxpayer and address
for the immediate past 3 taxable
years;
b. Nature of the request, specifying the
newly discovered evidence to be
presented;
c. Taxable periods covered by the
assessment;
d. Amount and kind of tax involved and
the assessment notice number;
e. Date of receipt of the assessment
notice or letter of demand;
f. Itemized statement of the finding to
which the taxpayer agrees (if any) as
basis for the computation of the tax
due, which must be paid upon filing
of the protest;
g. Itemized schedule of the
adjustments to which the taxpayer
does not agree;
h. Statements of facts or law in
support of the protest; and
i. Documentary evidence as it may
deem necessary and relevant to
support its protest to be submitted
60 days from the filing thereof.

Q: What must a motion for reconsideration raise?

A: It must raise new grounds, which have not been

raised in that request for reconsideration or
reinvestigation.

Note: A motion for reconsideration of the denial of the

administrative protest does not toll the 30-day period
to appeal to the CTA. (Fishwealth Canning Corporation
v. CIR, GR 179343, Jan. 21, 2010)

Protested Assessment

Q: What is the effect of a protest against an

assessment?

A: Prescriptive period provided by law to make

collection by distraint or levy or by a proceeding in
court is interrupted once a taxpayer protests the
assessment and requests for its cancellation.

When to File Protest

Q: What is the procedure to be followed in

protesting an assessment?

A:
1. BIR issues assessment notice.
2. The taxpayer files an administrative
protest against the assessment. Such
protest may either be a request for
reconsideration or for reinvestigation.
The protest must be filed within 30 days
from receipt of assessment.
3. All relevant documents must be
submitted within 60 days from filing of
protest; otherwise, the assessment shall
become final and unappealable.
4. In case the CIR decides adversely or if no
decision yet at the lapse of 180 days, the
taxpayer may appeal to the CTA Division,
30 days from the receipt of the decision

or from the lapse of the 180 days

otherwise the decision shall become
final, executory and demandable. (RCBC
v. CIR, GR 168498, Apr. 24, 2007)
5. If the decision is adverse to the taxpayer,
he may file a motion for reconsideration
or new trial before the same Division of
the CTA within 15 days from notice
thereof.
6. In case the resolution of a Division of the
CTA on a motion for reconsideration or
new trial is adverse to the taxpayer, he
may file a petition for review with the
CTA en banc.
7. The ruling or decision of the CTA en banc
may be appealed with the Supreme
Court through a verified petition for
review on certiorari pursuant to Rule 45
of the 1997 Rules of Civil Procedure.

Q: A taxpayer receives two final assessments, one

for Net Income Tax (NIT) and one for VAT. If the
taxpayer would only like to protest the one for NIT
and not the one for VAT, what should he do to file
a protest for the NIT?

A: The taxpayer should first pay the tax due under

the VAT, where he does not intend to file a protest.

Note: This is not payment under protest for this is

neither a tax under the TCC nor a Real Property Tax.
(RR 12-99)

Forms of Protest

Q: What are the kinds of protest to an

assessment?

A:
1. Request for reconsideration - a claim for
re-evaluation of the assessment based on
existing records without need of
additional evidence. It may involve a
question of fact or law or both. It does
not toll the statute of limitations.
2. Request for reinvestigation - a claim for
re-evaluation of the assessment based on
newly-discovered or additional evidence.
It may also involve a question of fact or
law or both. It tolls the the statute of
limitations.

Note: Under Sec. 223, NIRC, the running of the

prescriptive period can only be suspended by a request
for reinvestigation, not a request for reconsideration.

RECONSIDERATION
REINVESTIGATION
Involves re-evaluation of
assessment based on
existing records.
Involves presentation of
newly-discovered or
additional evidence.
It does not toll the Statute
of Limitations.
It tolls the Statute of
Limitations.

Submission of Documents within

60 Days from Filing of Protest

Q: What is a supporting document?

A: These are documents which the taxpayer feels

would be necessary to support his protest and not
what the Commissioner feels should be submitted,
otherwise, the taxpayer would always be at the
mercy of the BIR which may require production of
such documents which taxpayer could not produce.
(Standard Chartered Bank v. CIR, CTA case No.
5696, Aug. 16, 2001)

1. The 60 day period is counted from the

filling of the protest.
2. Non-submission of the documents
renders the assessment final, executory
and demandable.

Effect of Failure to Protest

Q: What is the effect of failure to protest a FAN?

A: It makes the FAN final and executory, and the

taxpayer loses his right to contest the assessment,
at the administrative and judicial levels. Thus the
filing of the protest within 30 days from the receipt
of the assessment would be mandatory for the
taxpayer to use the other administrative and
judicial remedies.

Rendition of Decision by Commissioner

Denial of Protest

Q: What are the forms of denial of the protest?

A:
1. Direct Denial of Protest
By an
administrative decision on a disputed
assessment, stating the facts, applicable
law, rules and regulations or
jurisprudence on which such decision is
based otherwise, the decision shall be
void in which case the same shall not be
considered a decision on a disputed
assessment and that the same is his final
decision. (RR 12-99)

2. Indirect Denial of Protest:

a. Formal and final letter of demand

from the BIR to the taxpayer.
b. Civil collection can also be
considered as denial of protest of
assessment (BIR v. Union Shipping
Corp., GR 66160, May 21, 1990)
c. Commissioner did not rule on the
taxpayer s motion for
reconsideration of the assessment,
the period to appeal will only start
when the respondent would receive
the summons for the civil action for
collection of deficiency tax (BIR v.
Union Shipping Corp., GR 66160, May
21, 1990)

Note: Preliminary collection letter may

serve as assessment notice. (United
International Pictures v. CIR, GR
110318, Aug. 28, 1996)

d. Issuance of warrant of distraint and

levy to enforce collection of
deficiency assessment is outright
denial of the request for
reconsideration (Hilado v. CIR. CTA
case 1256, Feb. 25, 1964)

Remedies of Taxpayer to Action by Commissioner

In Case of Denial of Protest

Q: What is the remedy available to the taxpayer if

the CIR denies his protest in whole or in part?

A: The remedy is to appeal such decision to the CTA

within 30 days from receipt of the decision
otherwise, the assessment will become final,
executor and demandable.

Note: If the taxpayer elevates his protest to the CIR

within 30 days from date of receipt of the final
decision of the CIR s duly authorized representative,
such decision will not be final and executory.

In Case of Inaction by Commissioner within

180 days from Submission of Documents

Q: What are the options given to the taxpayer if

there would be inaction by the CIR within 180 days
from submission of the documents?

A: The taxpayer has two alternative options:

1. File a petition for review with the CTA
within 30 days after the expiration of the
180-day period; or
2. Wait for the final decision of the CIR on
the disputed assessment and appeal the
final decision to the CTA within 30 days
from the receipt of the decision.

Effect of Failure to Appeal

Q: What is the effect of the failure to appeal by a

taxpayer?

A:
1. The decision or assessment becomes final
and executory.
2. In an action for the collection of the tax
by the government, the taxpayer is barred
from re-opening the question already
decided.
3. The assessment is considered correct
which may be enforced by summary or
judicial remedies.
4. In a proceeding for collection of tax by
judicial action, the taxpayer s defenses
are similar to those of the defendant in a
case for the enforcement of a judgment
by judicial action.
5. The assessment which has become final
and executor cannot be superseded by a
new assessment.

Informer s Reward

Q: To whom is the informer s reward given?

A: To persons instrumental:
1. In the discovery of violations of the NIRC;
and
2. In the discovery and seizure of smuggled
goods.

Q: What are the legal requirement/s must be

complied with to claim the reward?

A:

1. Voluntarily file a confidential information

under oath with the Law Division of the
BIR alleging therein the specific violations
constituting fraud;
2. The information must not yet be in the
possession of the BIR, or refer to a case
already pending or previously
investigated by the BIR;
3. One should not be a government
employee or a relative of a government
employee within the sixth degree of
consanguinity; and
4. The information must result to collections
of revenues and/or fines and penalties
(Sec. 282, NIRC) (2002 Bar Question)

Q: How much is the amount of the reward?

A:
1. For discovery of violations of the NIRC The amount of reward shall be whichever
is lower between:
a. 10% of the revenues, surcharges or
fees recovered and/or fine/penalty
imposed; or
b. One Million Pesos (P1, 000,000)

Note: The same amount of reward shall also

be given to an informer where the offender
has offered to compromise the violation of
law committed by him and his offer has
been accepted by the CIR and collected from
the offender.

2. For discovery and seizure of smuggled

goods - a cash reward equivalent to
whichever is lower between:
a. 10% of the fair market value of the
smuggled and confiscated goods; or
b. One Million Pesos (P1, 000,000)

Note: The informer shall not be entitled to a reward

where no revenue, surcharges or fees be actually
recovered or collected.

COLLECTION

Q: What is the method used in the collection of

taxes?

A: The legislature may adopt any reasonable

method for the effective enforcement of the
collection of taxes, subject to:
1. The right of the person to notice; and
2. The opportunity to be heard.

Note: The power to impose taxes is clothed with the

implied authority to devise ways and means to
accomplish collection in the most effective manner.
Without this implied power, the ends of government
may fail. (CIR v. Pineda, GR L-22734, Sept. 15, 1967)

Requisites

Q: What is the requirement before collection can

be made?

A: Collection is only allowed when there is already a

final assessment made for the determination of the
tax due. Assessments are deemed final when:
1. The taxpayer failes to file a protest 30
days from receipt of the assessment
2. After the 180 day period and the CIR has
not yet acted on the protest the taxpayer
fails to appeal it
3. After 30 days from the receipt of the
decision of the CIR the taxpayer fails to

appeal.

Prescriptive Period for Collection of Tax

Q: What are the prescriptive periods for the

collection of tax?

A:
GR:
1. Where an assessment was made - period
for collection (by distraint or levy or by a
proceeding in court) is within 3 years
following the assessment has been
released, mailed, or sent. (BPI v. CIR, GR
139736, Oct. 17, 2005)
2. In the case of a false or fraudulent return
with intent to evade tax or of failure to file
a return, a proceeding in court for the
collection of such tax may be filed
without assessment, at any time within
10 years after the discovery of the falsity,
fraud or omission. (Sec.222 [a], NIRC)

XPNs:
1. The same exceptions relative to the
prescriptive periods for assessment are
also applicable.
2. If the government makes another
assessment or the assessment made is
revised, the prescriptive period for
collection of such tax should be counted
from the date the last or revised
assessment was made.
3. Where an action is brought to enforce a
compromise, the prescriptive period is 10
years from the time the right of action
accrues as fixed in the Civil Code. (Art.
1144 [1], NCC)

Note: When it comes to self-assessed taxes

where a return is filed by the taxpayer. The
taxpayer is the one to assess himself and such
assessment is deemed to be adopted by the
government. Thus, the filing of the return would

also be the date of the assessment.

Q: How is judicial action for the collection of tax

commences?

A:
1. By the filing of a complaint with the
proper court of first instance, or where
the assessment is appealed to the CTA; or
2. By filing an answer to the taxpayer's
petition for review wherein payment of
the tax is prayed for. (Fernandez
Hermanos, Inc. v. CIR, GR L-21551, Sept.
30, 1969)

Q: When is collection by judicial action deemed

instituted?

A: Upon filing of the corresponding complaint in the

court of competent jurisdiction. In administrative
remedies, upon service of the distraint and levy on
the taxpayer or persons or entity authorized to
receive the same. (Diluangco v. CIR, GR L-16661,
Jan. 31, 1962)

Q: What is the prescriptive period where the

government action is on a bond which the
taxpayer executes in order to secure the payment
of his tax obligation?

A: 10 years under Art. 1144 (1) of the Civil Code and

not 3 years under the NIRC. In this case, the
Government proceeds by court action to forfeit a

bond. The action is for the enforcement of a

contractual obligation. (Republic v. Araneta, GR L14142, May 30, 1961)

Q: On Aug. 5, 1997, Adam filed a request for

reconsideration of the deficiency withholding tax
assessment on July 10, 1997, covering the taxable
year 1994. After administrative hearings, the
original assessment of P150,000 was reduced to
P75,000. A modified assessment was thereafter
issued on Aug. 5, 1999. Despite repeated
demands, Adam failed and refused to pay the
modified assessment. Consequently, the BIR
brought an action for collection in the RTC on Sept.
15, 2000. Adam moved to dismiss the action on
the ground that the government right to collect
the tax by judicial action has prescribed. Decide.

A: The right of the Government to collect by judicial

action has not prescribed. The filing of the request
for reconsideration which was acted upon by the
CIR suspended the running of the 3-year
prescriptive period for collection and commenced
to run again when a decision on the protest was
made on Aug. 5, 1999. (2002 Bar Question)

Q: Explain the rules on assessment and collection.

A:
RETURN FILED WAS NOT
FALSE OR FRAUDULENT
NO RETURN WAS FILED,
OR THE RETURN FILED
WAS FALSE OR
FRAUDULENT
Collection With Prior Assessment
Assessment should be
made within 3 years from
the date of filing of the
return or from the last day
required by law for filing,
whichever is later (Sec.
203, NIRC)
Assessment should be
made within 10 years from
the date of discovery of the

failure to file the return, or

the falsity or fraud in the
return (Sec.222 [a], NIRC)
Collection should be made within 3 years from the date of
assessment or from the filing of the return, either by:
1. Summary proceedings; or
2. Judicial proceedings (Sec.222 [c], NIRC)
Collection Without Prior Assessment
Assessment should be
made within 3 years from
the date of filing of the
return or from the last day
required by law for filing,
whichever is later (Sec.
203, NIRC)
Assessment should be
made within 10 years from
the date of discovery of the
failure to file the return, or
the falsity or fraud in the
return (Sec.222 [a], NIRC)
Collection should be made within 10 years after the
discovery of falsity or fraud or non-filing and it should only
be by judicial proceeding (Sec. 222 [a], NIRC)

*See discussion on Distraint, Levy, Forfeiture, Tax

Lien, Compromise and Abatement

Judicial Remedies of a Taxpayer

Civil Action.

Q: What are the civil actions available to the

taxpayer?

A:
1. Appeal to the CTA in devision
within 30
days from receipt of decision on the

protest or from the lapse of 180 days due

to inaction of the CIR. (Sec. 228, NIRC)
2. Appeal to the CTA en banc
the party
adversely affected by the decision of a
CTA division may file a motion for
reconsideration or new trial within 15
days from receipt of the decision with the
CTA division. If the MR is denied file a
petition for review with the CTA en banc.
3. Appeal to the SC
within 15 days from
the receipt of the decision of the CTA.
4. By way of special civil action
Petition for
certiorari, prohibition and mandamus to
the SC in cases of grave abuse of
discretion, lack or excess of jurisdiction.
5. Action to contest forfeiture of chattel, at
any time before the sale or destruction
thereof, to recover the same, and upon
giving proper bond, enjoin the sale; or
after the sale and within 6 months, an
action to recover the net proceeds
realized at the sale (Sec. 231, 1997 NIRC);
and
6. Action for damages against a RO by
reason of any act done in the
performance of official duty. (Sec. 227,
1997 NIRC)
7. Injunction when the CTA is in the
opinion that the collection by the BIR may
jeopardize taxpayer.

Q: What may the CTA review in case of an appeal

to them?

A: CTA may review the decision of the CIR on the

disputed assessments. (CIR v. Villa, GR L-23988, Jan.
2, 1968)

Q: May the CIR still modify its assessment despite

the CTA has already acquired jurisdiction?

A: Yes, provided it would be done before an answer

is filed with the court.

Q: Is protest at the time of payment of taxes and

duties a requirement to preserve the taxpayer's
right to claim a refund?

A:
1. For taxes imposed under the NIRC protest at the time of payment is not
required to preserve the taxpayer s right
to claim refund. This is clear under Sec.
230 of the NIRC which provides that a suit
or proceeding maybe maintained for the
recovery of national internal revenue tax
or penalty alleged to have been
erroneously assessed or collected,
whether such tax or penalty has been paid
under protest or not.

2. For duties imposed under the Tariff and

Customs Code (TCC) - a protest at the time
of payment is required to preserve the
taxpayers' claim for refund. The
procedure under the TCC is to the effect
that when a ruling or decision of the
Collector of Customs is made whereby
liability for duties is determined, the party
adversely affected may protest such
ruling or decision by presenting to the
Collector, at the time when payment is
made, or within 15 days thereafter, a
written protest setting forth his
objections to the ruling or decision in
question. (Sec. 2308, TCC) (1996 Bar
Question)

Criminal Action.

Q: What are the criminal actions available for the

taxpayer?

A: Filing of criminal complaint against erring BIR

officials and employees.

Note: With the enactment of the new CTA law (RA

9282) amending RA No. 1125, CTA now has jurisdiction
over criminal cases.

SUBSTANTIVE REMEDIES

1. Questioning the constitutionality or validity of

tax statutes or regulations
2. Non-retroactivity of rulings (Sec.246, NIRC)
3. Failure to inform the taxpayer in writing of the
legal and factual bases of assessment makes it
void (Sec. 228, NIRC)
4. Preservation of books of accounts and once a
year examination (Sec. 235, NIRC)

Claim For Refund

Q: What is a tax refund?

A: It is an actual reimbursement of tax.

Q: When may this be availed of?

A: This is a remedy after the payment of tax

liability.

Q: What are the distinctions between tax refund

and tax credit?

A:
TAX REFUND
TAX CREDIT
The taxpayer asks for
restitution of the money

paid as tax
The taxpayer asks that the
money paid be applied to
his existing tax liability
2-yr period to file the
claim with the CIR starts
after the payment of the
tax or penalty
2-yr period starts from the
date such credit was
allowed
in case credit is
wrongly made

Q: Who may claim a tax refund?

A:
GR: The taxpayer who paid the same

XPN:

Case
The one
entitled for the
refund
Reason
Where the tax
has been
shifted
The taxpayer
(even if the tax
was shifted by
the taxpayer to
his customers as
in sales tax and
even if the tax
has been billed
as a separate
item in the
invoice) (CIR v.
American
Rubber GR L19667, Nov. 29,

1966)
The sales tax is
imposed directly
on the seller as an
occupation tax.
Once recovered,
the seller must
hold the refunded
taxes in trust for
the individual
purchasers who
advanced
payment thereof
and whose name
must appear on
his record
Where the
payer is not the
taxpayer (i.e.
theater owners
who paid illegal
municipal taxes
billed and
collected from
theater goers)
Theater goers
are not entitled
to claim the
refund of such
taxes (Medina v.
Baguio, GR L4060, Aug. 29,
1952)

Where the
payer is the
withholding
agent
The withholding
agent (CIR v.
Proter and
Gamble, GR L66838, Apr. 15,
The withholding
agent is directly
and
independently
liable for the

1988)
correct amount of
tax that should be
withheld of
deficiency
assessments
surcharges and
penalties.
Where the
donor s tax was
assumed by the
donee
Donee is the
proper party to
claim the refund
of the donor s
tax (even if the
tax was
advanced by the
donor)

Q: What are the requisites for a tax refund or tax

credit?

A:
1. There must be a written claim with the
CIR, as it would enable the CIR to correct
the errors of his subordinate and to notify
the government;
2. Must be a categorical claim for refund or
credit;
3. Must be filed within 2 years after the
payment of the tax or penalty otherwise
no refund or credit could be taken. No
suit or proceeding shall be instituted after
the expiration of the 2 year period
regardless of any supervening cause that
may arise after payment; and
4. Present proof of payment of the tax.

Q: What are the grounds for filing a claim for tax

refund or tax credits?

A: EEW
1. Tax is Erroneously or illegally collected.
2. Sum collected is Excessive or in any
manner wrongfully collected.
3. Penalty is collected Without authority.

Q: Distinguish between illegally collected tax and

erroneously collected tax?

A:
Illegaly Collected Tax
Erroneously collected tax
Definition
There is a violation of
certain provisions of tax
law or statute.
No violation of the law but
there is a mistake in
collection.
On the part of the Taxpayer
The tax was paid by him
under duress.
The payment was made under
a mistake of fact.
On the part of the Government
The tax was collected in
patent disregard of the
law.
The collection was made
based on a misapplication of

the law.

Q: How are claims for refund construed?

A: Tax refunds, condonations and amnesties, being

in the nature of tax exemptions, must be strictly
construed against the taxpayer and liberally in favor
of the government.

Q: Are claims for refund always construed strictly

against the taxpayer?

A: No, not all claims for tax refunds are in the

nature of tax exemptions. A tax refund may only be
considered as a tax exemption when it is based on a
tax-exemption statute or a tax-refund statute. In
such cases, the rule of strict interpretation against
the taxpayer is applicable as the claim for refund
partakes of the nature of an exemption. Tax refunds
or tax credits are not founded principally on
legislative grace, but on the legal principle of quasicontracts against a person s unjust enrichment at
the expense of another. The erroneous payment of
tax as a basis for a claim of refund may be
considered as a case of solutio indebiti, which the
government is not exempt from its application and
has the duty to refund without any unreasonable
delay what it has erroneously collected. (CIR v.
Fortune Tobacco Corp., GR 167274, July 21, 2008)

Q: What is the Irrevocability Rule?

A: The exercise of the option to carry over excess

tax credits bars a taxpayer from claiming the same
excess tax credits for refund in the succeeding
taxable year. Sec. 76 of the NIRC provides that once
the option to carry over and apply the excess
quarterly income tax due for the taxable quarters of
the succeeding taxable years has been made, such
option shall be considered irrevocable for that
taxable period and no application for cash refund or
issuance of tax credit certificate shall be allowed.
These remedies are in the alternative and the
choice of one precludes the other.

The phrase such option shall be considered

irrevocable for that taxable period in Sec. 76 of the
NIRC means that the option to carry over the excess
tax credits of a particular taxable year can no longer
be revoked. (SYSTRA Phil., Inc. v. CIR, GR 176290,
Sept. 21, 2007)

Q: What is a Tax Credit Certificate?

A: It is validly issued under the provisions of the

NIRC and may be applied against any internal
revenue tax, excluding withholding taxes, for which
the taxpayer is directly liable. (Sec. 204 [C], NIRC)

Q: Is a deficiency tax assessment a bar to a claim

for tax refund or tax credit?

A: Yes, the deficiency tax assessment is a bar to a

tax refund or credit. The taxpayer cannot be
entitled to a refund and at the same time liable for
a tax deficiency assessment for the same year. The
deficiency assessment creates a doubt as to the
truth and accuracy of the Tax Return. Said Return
cannot therefore be the basis of the refund. ( CIR v.
CA, GR 106611, July 21, 1994) (2005 Bar Question)

Q: Is the government liable for interests on tax

refunds?

A:
GR: There can be no interest on refund of tax.

XPNs:
1. If interest is authorized by law.
2. Arbitrariness in the collection of tax.
3. Under Sec. 79 C [2] with respect to
income taxes withheld on the wages of
the employees.

Note: An action is not arbitrary when exercised

honestly and upon due consideration where
there is room for two opinions, however much it
may be believed that an erroneous conclusion
was reached. Arbitrariness presupposes
inexcusable or obstinate disregard of legal
provisions. (Philex Mining Corp. v. CIR, GR
120324, Apr. 21, 1999)

Q: What should be done within the the 2-year

prescriptive period for tax refund?

A: It is necessary that the:

1. Claim for refund in the BIR; and
2. Proceeding in the CTA

Is commenced within the 2-year prescriptive period

counted from the date of full payment of the tax or
penalty regarless of any supervening event. (Sec.
229, NIRC)

Note: This 2-year prescriptive period applies only for

the recovery of taxes or penalties erroneously,
excessively, illegally or wrongfully collected.
Accordingly, an ordinary claim for tax credit would
prescribe in 10 years under Art 1144 NCC.

Q: State the reckoning of the 2-year prescriptive

periods for tax refunds.

A:
1. Tax is paid in installments
2 years
should be counted from the date of the
final payment.
2. Payments effected through the
withholding tax system It is from the
end of the taxable year or when the tax
liability falls due that the 2 year
prescriptive starts to run.
3. In corporate dissolution
The 2-year
prescriptive period should be counted
from 30 days after the approval by the
SEC of its plan of dissolution.

Q: What are the conditions for the grant of tax

refund when the creditable withholding tax is in
excess of the amount of the tax due?

A:
1. The claim is filed with the CIR within the
2-year period from the date of payment
of the tax or from the date of the filing of
the Final Adjustment Return;
2. It must be shown in the return of the

recipient that the income payment

received was declared as part of the gross
income; and
3. The fact of withholding is established by a
copy of a statement duly issued by the
payor to the payee showing the amount
of the tax withheld therefrom. (Citytrust
Finance Corp. v. CTA and CIR, CA GR. SP
No. 28239)

Q: Distinguish between a taxpayer s remedies in

connection with his tax assessment and/or
demand and his claim for refund of taxes alleged
to have been erroneously or illegally collected?

A:
Against an Assessment
A tax assessment becomes final unless it is disputed or
contested within 30 days from receipt thereof by the
taxpayer. If the action taken by the CIR on the request for
reconsideration is unacceptable to the taxpayer, the latter
must then appeal, by way of Petition for Review to the
CTA within 30 days from receipt of the decision of the CIR.
The taxpayer may also opt to pay the tax before the
finality of the assessment (e.g., within 30 days from
receipt of the assessment) and then file within 2 years a
written claim for the refund of the tax.
Claim for Refund
A denial by the CIR of a claim for refund must be appealed
to the CTA within 30 days from receipt of notice of denial
and within 2 years from the day of full and final payment.
Continued inaction by the CIR on claims for refund may
thus be taken as a denial appealable to the CTA, in order
to permit the appeal to be considered or having been
made within the two-year mandatory period.

Q: XCEL Corp. filed its quarterly income tax return

for the first quarter of 1985 and paid P500.000 on
May 15, 1985. In the subsequent quarters, XCEL
suffered losses. On Apr. 15, 1986 it declared a net

loss of P1,000,000 in its annual income tax return.

After failing to get a refund, XCEL filed on Mar. 1,
1988 a case with the CTA to recover the P500.000
in taxes paid on May 15, 1985. Is the action to
recover the taxes filed timely?

A: The action for refund was filed in the CTA on

time. In the case of CIR v. TMX Sales, Inc., GR 83736,
Jan. 15, 1992, which is similar to this case, the SC
ruled that in the case of overpaid quarterly
corporate income tax, the two-year period for filing
claims for refund in the BIR as well as in the
institution of an action for refund in the CTA, the
two-year prescriptive period for tax refunds is
counted from the filing of the final, adjustment
return under Sec. 67 of the NIRC, and not from the
filing of the quarterly return and payment of the
quarterly tax. The CTA action on Mar. 1, 1988 was
clearly within the reglementary 2-year period from
the filing of the final adjustment return of the
corporation on Apr. 15, 1986. (1994 Bar Question)

Q: A Corp. files its income tax return on a calendar

year basis. For the first quarter of 1993, it paid on
May 30, 1993 its quarterly income tax of P3
million. On Aug. 20, 1993, it paid the second
quarterly income tax of P0.5 million. The third
quarter resulted in a net loss, and no tax was paid.
For the fourth and final return for 1993, the
company reported a net loss for the year, and the
taxpayer indicated in the income tax return that it
opted to claim a refund of the quarterly income
tax payments. On Jan. 10, 1994, the corporation
filed with the BIR a written claim for the refund of
P3.5 million.

BIR failed to act on the claim for refund; hence, on

Mar. 2, 1996, the A Corp. filed a petition for review
with the CTA on its claim for refund of the
overpayment of its 1993 quarterly income tax. BIR,
in its answer to the petition, alleged that the claim
for refund was filed beyond the reglementary
period. Did the claim for refund prescribe?

A: Yes, the counting of the two-year prescriptive

period for filing a claim for refund is counted not
from the date when the quarterly income taxes
were paid but on the date when the final
adjustment return or annual income tax return was
filed. (CIR v. PhilAm Life Insurance Co., Inc., GR
105208, May 29, 1995) It is obvious that the annual

income tax return was filed before Jan. 10, 1994

because the written claim for refund was filed with
the BIR on Jan. 10, 1994. Since the 2-year
prescriptive period is not only a limitation of action
in the administrative stage but also for bringing the
case to the judicial stage, the petition for review
filed with the CTA on Mar. 02, 1996 is beyond the
reglementary period. (1997 Bar Question)

Q: On Mar. 12, 2001, REN paid his taxes. Ten

months later, he realized that he had overpaid and
immediately filed a claim for refund with the CIR.
On Feb. 27, 2003, he received the decision of the
CIR denying REN's claim for refund. On Mar. 24,
2003, REN filed an appeal with the CTA. Was his
appeal filed on time or not?

A: No, his appeal was not filed on time. The 2-year

period for filing a claim for refund is not only a
limitation for pursuing the claim at the
administrative level but also for appealing the case
to the CTA. The law provides that "no suit or
proceeding shall be filed after the expiration of 2
years from the date of the payment of the tax or
penalty regardless of any supervening cause that
may arise after payment. Since the appeal was only
made on Mar. 24, 2003, more than two years had
already elapsed from the time the taxes were paid
on Mar. 12, 2003. Accordingly, REN had lost his
judicial remedy because of prescription. (2004 Bar
Question)

Q: When must an appeal to CTA be filed if the

claim for refund was denied by the CIR?

A: It must be filed within 30 days from receipt of

the decision of the CIR but not to exceed the 2-year
period from date of payment of the tax or penalty
regardless of any supervening cause that may arise
after payment.

Note: If the decision of the CIR takes too long and the
2-year period is about to end, proceedings in the CTA
must be commenced and there would no longer be
any need to wait for the decision of the CIR.

Q: Alyanna has a pending claim for refund with the

CIR. The 2-year period is about to end and the CIR has

yet to decide on the claim. What must Alyanna do to

pursue her claim for refund?

A: A claim for refund must be filed with the BIR and

the commencement of the proceedings in the CTA
must be done within the 2-year period from the date
of full payment of the tax or penalty regarless of any
supervening event. Thus, Alyanna must commence the
proceedings with the CTA before the end of the 2-year
period without waiting for the decision of the CIR.

Q: Who is the proper party to question/seek a tax

refund in indirect taxes?

A: In indirect taxes, the proper party who can

question or seek a refund of the tax is the person
on whom the tax is imposed by law and who paid

the tax even when he shifts the burden thereof to

another. (Cebu Portland Cement Co. v. Collector, GR
L-20563, Oct. 29, 1968)

Q: Silkair purchased aviation jet fuel from Petron

for use on Silkair international flights. Silkair,
contending that it is exempt from the payment of
excise taxes, filed a formal claim for refund with
the CIR. Silkair claims that it is exempt from the
payment of excise tax under the NIRC, specifically
Sec. 135, and under Art. 4 of the Air Transport
Agreement between the Governments of the
Republic of the Philippines and the Republic of
Singapore (Air Agreement). The CIR denied the
claim contending that since the liability for the
excise tax payment is imposed by law on Petron as
the manufacturer of the petroleum products, any
claim for refund should only be made by Petron as
the statutory taxpayer. On appeal, the CTA
resolved to deny the claim. Silkair thus filed this
Petition for Review.

1. Whether or not Silkair is the proper party to

claim a refund for the excise taxes paid.
2. What is the proper remedy of the Silkair?

A:
1. The SC held that the proper party to
question, or seek a refund of an indirect
tax is the statutory taxpayer, the person
on whom the tax is imposed by law and
who paid the same even if he shifts the
burden thereof to another.

Excise tax on petroleum is an indirect tax.

Although the burden to pay an indirect
tax can be passed on to the purchaser of
the goods, the liability to pay the indirect
tax remains with the petroleum
manufacturer or seller. When the
manufacturer or seller decides to shift the
burden of the excise tax to the taxexempt purchaser, the tax becomes a part
of the price of the commodity. Thus, in
this case, the petroleum manufacturer
who is the statutory taxpayer is the
proper party to claim the refund.

2. The exempt entity s remedy is to invoke

its tax exemption before buying the
petroleum so that the petroleum
manufacturer would not pass on the
excise taxes as part of the purchase price.
(Silkair Singapore PTE. Ltd. v. CIR, GR
171383 & 172379, Nov. 14, 2008)

Q: Does a withholding agent or a subsidiary

corporation have the personality to file a written
claim for refund?

A: Yes, a withholding agent is technically a taxpayer

because it is required to deduct and withhold the
tax, and the obligation to remit the same to the
government. So the withholding agent is liable for
the tax. It has therefore the personality to file a
written claim for refund.

Withholding agent is
taxpayer but also an
Since it is an agent
authorized to file a

not only an agent of the

agent of the government.
of the taxpayer, it is ipso facto
written claim for refund.

Note: However, as a rule, the withholding agent is not

considered as the taxpayer, hence he is not entitled to
a tax amnesty due for the taxpayer s account.

Q: Is payment under protest a requirement?

A: No. A suit or proceeding for tax refund may be

maintained whether or not such tax, penalty or
sum has been paid under protest or duress. (Sec.
204 [3], NIRC)

Note: The taxpayer s willingness to pay the tax is no

waiver to raise, defenses against the tax s legality. (CIR
v. Gonzales, GR L-19495, Nov. 24, 1966)

Q: When is payment under protest required?

A: Payment under protest is necessary in claims for

refund for real property taxes under Sec. 252, LGC
and for customs duties under Sec. 2308, TCC.

Q: PERF filed an administrative claim with the

appellate division of the BIR for refund of overpaid
income taxes. Due to the inaction of the BIR, PERF
filed a petition for review with the CTA seeking for
the said refund. The CTA denied the petition of
PERF on the ground of insufficiency of evidence.
The CTA noted that PERF did not indicate in its
1997 ITR the option to either claim the excess
income tax as a refund or tax credit pursuant to
Sec. 76, NIRC. It held that the failure of PERF to
signify its option on whether to claim for refund or
opt for an automatic tax credit and to present its
1998 ITR left the Court with no way to determine
with certainty whether or not PERF has applied or
credited the refundable amount sought for in its
administrative and judicial claims for refund.

1. Is the failure of PERF to indicate its choice to

avail of either the tax refund or the tax credit
in the annual ITR fatal to its claim for refund?
2. Is the failure of PERF to present in evidence
the 1998 ITR fatal to its claim for refund?

A:
1. No, failure to indicate a choice to avail of
either the tax refund or the tax credit in the
annual ITR is not fatal to a claim for refund and
should not bar the availment of such remedy.
While a taxpayer is required to mark its choice
in the form provided by the BIR, this
requirement is only for the purpose of
facilitating tax collection. A taxpayer that
makes a choice expresses certainty or
preference and thus demonstrates clear
diligence. Conversely, a taxpayer that makes
no choice expresses uncertainty or lack of
preference and hence shows simple negligence
or plain oversight.

Note: A return filed showing an overpayment

shall be considered as a written claim for credit or
refund. (Sec. 204, NIRC)

2. No, failure to formally offer the 1998 ITR is

not fatal to a claim for refund where the said
document is attached to a subsequent motion
for reconsideration and has become part of
the records of the case. (CIR v. PERF Realty
Corp., GR 163345, July 4, 2008)

Q: Fortune Tobacco Corp. was granted a tax refund

representing excise taxes erroneously collected
from its tobacco products. The tax refund is being
re-claimed by the BIR in a petition before the SC.
The BIR argued that tax refund partakes of the
nature of a tax exemption and should be
construed against the claimant. Is the BIR correct?

A: No, not all claims for tax refunds are in the

nature of tax exemptions. A tax refund may only be
considered as a tax exemption when it is based
either on a tax-exemption statute or a tax-refund
statute. The company s claim for tax refund is not
based on either a tax-exemption statute or a taxrefund statute, but is premised on either an
erroneous payment of tax or the government s
exaction in the absence of a law. Thus, what is
controlling in this case is the well-settled doctrine
of strict interpretation in the imposition of taxes,
and not the doctrine as applied to tax exemptions.
As burdens, taxes should not be unduly exacted nor

assumed beyond the plain meaning of the tax laws.

(CIR v. Fortune Tobacco Corp., GR 167274-75 July
21, 2008.)

Q: When is there waiver of prescription in an

action for refund?

A:
GR: If the government failed to plead
prescription in a motion to dismiss or as a
defense in its answer to the petition for
review.

XPN: Taxpayer amends his petition for review

alleging therein a new cause of action and the
government pleads prescription in his answer
to the amended petition for review.

Q: On June 16, 1997, the BIR issued against the

Estate of Mott a notice of deficiency estate tax
assessment, inclusive of surcharge, interest and
compromise penalty. The Executor of the Estate of
Mott filed a timely protest against the assessment
and requested for waiver of the surcharge,
interest and penalty. The protest was denied by
the CIR with finality on Sept. 13, 1997.
Consequently, the Executor was made to pay the
deficiency assessment on Oct. 10, 1997. The
following day, the Executor filed a Petition with
the CTA praying for the refund of the surcharge,
interest and compromise penalty. The CTA took
cognizance of the case and ordered the CIR to
make a refund. The CIR filed a Petition for Review
with the CA assailing the jurisdiction of the CTA
and the Order to make refund to the Estate on the
ground that no claim for refund was filed with the
BIR.

1. Is the stand of the CIR correct?

2. Why is the filing of an administrative claim
with the BIR necessary?

A:
1. Yes, for there was no claim for refund or
credit that has been duly filed with the

CIR which is required before a suit or

proceeding can be filed in any court.
(Sec. 229, NIRC) The denial of the claim
by the CIR is the one which will vest the
CTA jurisdiction over the refund case
should the taxpayer decide to appeal on
time.

2. The filing of an administrative claim for

refund with the BIR is necessary in order:
a. To afford the CIR an opportunity to
consider the claim and to have a
chance to correct the errors of
subordinate officers (Gonzales v.
CTA, GR 14532, May 26, 1965); and
b. To notify the Government that such
taxes have been questioned and the
notice should be borne in mind in
estimating the revenue available for
expenditures. (Bermejo v. Collector,
GR L-3028, July 29, 1950) (2000 Bar
Question)

Q: Congress enacts a law granting grade school

and high school students a 10% discount on all
school-prescribed textbooks purchased from any
bookstore. The law allows bookstores to claim the
discount in full as a tax credit.

1. If in a taxable year a bookstore has no tax due

on which to apply the tax credits, can the
bookstore claim from the BIR a tax refund in
lieu of tax credit?
2. Can the BIR require the bookstores to deduct
the amount of the discount from their gross
income?
3. If a bookstore closes its business due to losses
without being able to recoup the discount,
can it claim reimbursement of the discount
from the government on the ground that
without such reimbursement, the law
constitutes taking of private property for
public use without just compensation?
A:
1. No, there is nothing in the law that grants
a refund when the bookstore has no tax
liability against which the tax credit can
be used. A tax credit is in the nature of a
tax exemption and in case of doubt, the
doubt should be resolved in strictissimi
juris against the claimant. (CIR v. Central
Luzon Drug, GR 159647, Apr. 15, 2005)

2. No, tax credit which reduces the tax

liability is different from a tax deduction
which merely reduces the tax base. Since
the law allowed the bookstores to claim
the discount in full as a tax credit, the BIR
is not allowed to expand or contract the
legislative mandate (CIR v. Bicolandia
Drug Corporation, GR 148083, July 21,
2006)

3. No, if the business continues to operate

at a loss and no other taxes are due, thus
compelling it to close shop, the credit can
never be applied and will be lost
altogether. (CIR v. Central Luzon Drug, GR
159647, Apr. 15, 2005) The grant of the
discount to the taxpayer is a mere
privilege and can be revoked anytime.

(2006 Bar Question)

Q: Can Tax Refunds / Tax Credit be Forfeited to the

Government?

A:
1. Tax Refund
Yes, when a refund check or
warrant remains unclaimed or uncashed
within 5 years from date of mailing or
delivery.
2. Tax Credit Yes, a Tax Credit Certificate
which remains unutilized after 5 years
from date of issue, shall be invalid. Unless
revalidated (Sec. 230, NIRC)

Government Remedies

Q: What are the administrative remedies of the

government for collection of delinquent taxes
under the NIRC?

A: CELCED
1.
2.
3.
4.
5.
6.

Distraint of personal property

Levy of real property
Enforcement of forfeiture
Enforcement of tax lien
Compromise and Abatement
Civil penalties

Q: What are the guidelines that must be observed

with respect to administrative remedies?

A:
GOVERNMENT
TAXPAYER
If Express
Must observe the legal
parameters set forth in
the law (e.g. procedure
for distraint of personal
property (Sec. 207 [A],
NIRC), for levy on real
property (Sec. 207 B) and
enforcement of tax lien
(Sec. 219)
Must observe the
doctrine of exhaustion of
administrative remedies.
Thus, before the
taxpayer may question
an assessment before the
CTA, he must first file an
administrative protest
before the BIR. (Same is
true with claims for
refunds)
If Implied
Both may avail of the usual remedies for convenience
and expediency.

Q: Taxpayer duly protested a PAN it received from

the BIR. Subsequently, the BIR issued a FAN to the
taxpayer. The demand letter states: This is our
final decision based on investigation. If you
disagree, you may appeal the final decision within
30 days from receipt hereof, otherwise said
deficiency tax assessment shall become final,
executory and demandable. Instead of filing a
protest on the assessment, the taxpayer filed a
petition for review with the CTA. The BIR filed a
motion to dismiss on the ground that the taxpayer
failed to exhaust administrative remedies by filing
a protest on the assessment. Should the motion be
granted?

A: No, this case is an exception to the rule on

exhaustion of administrative remedies on the

ground that the BIR is in estoppel. The taxpayer

cannot be blamed for not filing a protest against the

FAN since the language used and the tenor of the
demand letter indicate that it is the final decision of
the CIR on the matter. The court reminded the CIR
to indicate, in a clear and unequivocal language,
whether its action on a disputed assessment
constitutes its final determination thereon in order
for the taxpayer concerned to determine when his
or her right to appeal to the tax court accrues. Thus,
the CIR is now estopped from claiming that t did
not intend the FAN to be a final decision. (Allied
Banking Corp. v. CIR, GR 175097, Feb. 5, 2010)

Administrative Remedies
Distraint

Q: Define distraint.

A: It is a summary remedy whereby the collection

of tax is enforced on the goods, chattels or effects
of the taxpayer (including other personal property
of whatever character as well as stocks and other
securities, debts, credits, bank accounts and
interest in or rights to personal property.) The
property may be offered in a public sale, if taxes are
not voluntarily paid.

Q: What are the requisites for the exercise of

distraint (and levy)?

A: DeF DeP
1. Taxpayer is Delinquent in payment of tax;
2. There must be subsequent Demand to
pay;
3. Taxpayer Failed to pay delinquent tax on
time; and
4. Period within which to assess and collect
the tax due has not yet prescribed.

Q: What are the kinds of distraint?

A:
1. Actual
resorted to when there is actual
delinquency in tax payment.

2. Constructive
a preventive remedy which
aims at forestalling a possible dissipation
of the taxpayer s assets when
delinquency sets in. Hence, no actual
delinquency in payment is necessary.

Actual Distraint

Q: How is actual distraint of personal property

effected?

A: Upon failure to pay the delinquent tax at the

time required, the proper officer shall seize and
distraint any goods, chattels, or effects, and the
personal property, including stocks and other
securities, debts, credits, bank accounts and
interests in and rights to personal property of the
taxpayer in sufficient quantity to satisfy the tax,
expenses of distraint and the cost of the
subsequent sale.

Q: Who is authorized to issue the warrant of

distraint?

A:
1. CIR or his duly authorized
representative if the amount
involved is in excess of P1 million; or
2. Revenue District Officer
if the
amount involved is P1 million or less.
(Sec. 207 [A], NIRC)

Q: What is the procedure that must be observed in

effecting actual distraint?

A:
1. Commencement of distraint proceedings
by the CIR or his duly authorized
representatives or by the revenue district
officer as the case may be
2. Service of warrant of distraint upon
taxpayer or upon any person in
possession of the property
3. Posting of notice in not less than 2 public
places in the municipality or city and
notice to taxpayer specifying the time and
place of sale and the articles distrained
4. Sale at public auction to be held not less
than 20 days after notice to the owner or
possessor of the property and publication
or posting of such notice
5. Disposition of proceeds of the sale
6. Residue over and above what is required
to pay the entire claim, including
expenses, shall be returned to the owner
of the property sold

Q: To whom is the warrant of distraint served?

A:
1. As to tangible goods:
a. The owner or person in possession;
or
b. Someone of suitable age and
discretion at the dwelling or place of
business of such person.

2. As to stocks and/or securities:

a. Upon the taxpayer; and

b. President, manager, treasurer or
other responsible officer of the
corporation.

3. As to debts/credits:
a. Upon the person owing the debt; or
b. The person having control over the
credit or his agent.

4. As to bank accounts:
a. Upon the taxpayer and
b. The president, manager, treasurer or
other responsible officer of the bank.

Note: Distraint of bank accounts is called

garnishment.

Q: What are the rules governing the sale?

A:
1. The sale must be held at the time and
place stated in the notice.

2. It may be conducted by the Revenue

Officer or through a licensed commodity
or stock exchange.

3. If the sale is conducted by the Revenue

Officer, it must be a public auction and
the property shall be sold to the highest
bidder for cash.

4. If the sale is through a licensed

commodity or stock exchange, it must be
with the approval of the CIR.

5. In case of stocks and other securities, the

officer making the sale shall execute a bill
of sale, which shall be delivered to the
buyer and to the corporation, company or
association which issued the stocks or
other securities.

Upon receipt of the copy of the bill

sale, an entry of transfer should be
in the company or association s book
a corresponding certificate of stock
be issued if required.

of
made
and
shall

6. Any residue over and above what is

required to pay the entire claim including
expenses shall be returned to the owner
of the property sold.

Note: Expenses chargeable upon seizure

shall include only those actual expenses of
seizure and preservation of the property
pending the sale and does not include
services of the Revenue Officer.

7. The officer making the sale shall make a

written report of the proceedings to the
CIR within 2 days after the sale (Sec. 211,
NIRC)

Q: May the government purchase the property

under distraint?

A: Yes, the CIR or his deputies may purchase the

property in behalf of the National Government for
the amount of taxes, penalties and cost due

thereon when the bid amount for the property

under distraint is:
1. Not equal to the amount of tax; or
2. Very much less than the actual market
value of the property offered for sale
(Sec. 212, NIRC)

Note: Property so purchased may be resold by the CIR

or his deputy. The net proceeds shall be remitted to
the National Treasury and accounted as internal
revenue.
Q: What is the remedy of the taxpayer once the
CIR or other proper officer issues the warrant of
distraint?

A: The taxpayer may request that the warrant be

lifted. The CIR may, in his discretion, allow the
lifting of the order of distraint. He may ask for a
bond as a condition for the cancellation of the
warrant. (Sec. 207, NIRC)

Q: May the taxpayer recover his property prior to

consummation of the sale?

A: Yes, if at any time prior to the consummation of

the sale all proper charges are paid to the officer
conducting the sale, the goods or effects distrained
shall be restored to the owner. (Sec. 210, NIRC)

Constructive Distraint

Q: How is constructive distraint effected?

A: It is effected by requiring the taxpayer or any

person having possession of the property:
1. To sign a receipt covering the property
distrained;
2. To obligate himself to preserve it intact
and unaltered; and
3. Not to dispose of it without the express

authority of the CIR.

Q: What if a taxpayer or person having possession

of property refuses or fails to sign?

A: The officer shall:

1. Prepare a list of such property; and
2. Leave a copy of such list in the premises
where the property is located, in the
presence of 2 witnesses.

Q: When may property of the taxpayer be placed

under constructive distraint?

A: LRT-ABUC
1. Taxpayer has a record of Leaving the
Philippines at least twice a year, unless
such business is justified and/or
connected with his trade, business or
profession;
2. Taxpayer applying for Retirement from
business has a huge amount of
assessment pending with the BIR;
3. Taxpayer has record of Transferring his
bank deposits and other personal
properties in the Phil. to any foreign
country except if taxpayer is a banking
institution;
4. Taxpayer uses Aliases in bank accounts
other than the name for which he is
legally and/or popularly known;
5. Taxpayer keeps Bank deposits and other
properties under the name of other
persons, whether or not related to him,
and the same are not under any lawful
fiduciary or trust capacity;
6. There is big amount of Undeclared
income known to the public and to the
BIR and there is a strong reason to believe
that the taxpayer will hide or conceal his
property;
7. BIR receives Complaint or information
pertaining to undeclared income (of big
amount) and such is supported by
substantial and credible evidence.

Q: Distinguish actual from constructive distraint.

A:

ACTUAL
CONSTRUCTIVE
Nature
Summary remedy
Subject matter
Personal property
Availability
Cannot be availed of if tax is not more than P100.
To whom made
Delinquent taxpayer
Any taxpayer
(delinquent or not)
How made
Taking of possession
or transfer of control
Mere prohibition from
disposing the property
How effected

Leaving a list of property

distrained or service of
warrant
Requiring taxpayer to sign
a receipt or leaving a list
of such property
Effect on collection
Immediate step to collect
Merely to prevent the
taxpayer from disposing his
property

Q: Can property levied upon by the order of a

competent court be subsequently distrained?

A: Yes, such property may, with the consent of such

court, be subsequently distrained, subject to the
prior lien of the attachment creditor. (CIR v. Floresl,
GR L- 9675, Sept. 28, 1957)

Q: What is Garnishment?

A: It is the taking of personal properties, cash or

sums of money owned by a delinquent taxpayer
which is in the possession of a third party (i.e. bank
accounts.) Bank accounts are garnished by serving a
warrant upon the taxpayer and upon the president,
manager, treasurer, or other responsible officer of
the bank.
Levy

Q: Define levy.

A: It is the seizure of real property and interest in or

rights to such properties for the satisfaction of
taxes due from the delinquent taxpayer.

Q: When may levy on real property be made?

A: It may be made before, simultaneously or after

the distraint of personal property of the same
taxpayer.

Q: How is levy on real property effected?

A: It may be effected by serving upon the taxpayer

a written notice of levy in the form of a duly
authenticated certificate prepared by Revenue
District Officer containing: [DNA]
1. Description of the property upon which
levy is made;
2. Name of the taxpayer;
3. Amount of tax and penalty due.

Q: What is the procedure that must be observed in

levy of real property?

A:
1. Preparation of a duly authenticated
certificate which shall operate with force
of a legal execution throughout the
Philippines.
2. Service of the written notice to the:

a. Delinquent taxpayer, or
b. If he is absent from the Philippines,
to his agent or the manager of the
business in respect to which the
liability arose, or
c. If there be none, the occupant of the
property.
d. The Registry of Deeds of the place
where the property is located shall
also be notified;
3. Advertisement of the time and place of
sale within 20 days after the levy by
posting of notice and by publication for
three consecutive weeks.
4. Sale at a public auction.
5. Disposition of proceeds of sale.
6. Residue to be returned to the owner.

Q: What is the effect of service of warrant of

distraint or levy?

A: Its timely service suspends the running of the

prescriptive period to collect the tax deficiency in
the sense that the disposition of the attached
properties might well take time to accomplish,
extending even after the lapse of the statutory
period for collections. In those cases, the BIR did
not file any collection case but merely relied on the
summary remedy of distraint and levy to collect the
tax deficiency. Thus, the enforcement of tax
collection through summary proceedings may still
be carried out as the service of warrant of distraint
or levy suspends the prescriptive period for
collection. (RP v. Hizon, GR 130430, Dec. 13, 1999)

Q: Suppose an auction sale of land for the

collection of delinquent taxes was held, is notice
by publication enough or must there be personal
service of notice?

A: Notice by publication is not enough there must

be a personal notice to the registered owner of the
property for cases involving an auction sale of land
for the collection of delinquent taxes are in
personam. (Talusan v. Tayag, GR 133698, Apr. 4,
2001)

Q: May the BIR forfeit the property subject to

levy?

A: Yes, forfeiture is allowed if:

1. there is no bidder; or
2. bid amount is insufficient.

Q: May the taxpayer recover his property prior to

consummation of the sale?

A: Yes, at any time before the day fixed for the sale,
the taxpayer may discontinue all proceeding by
paying the taxes, penalties and interest. (Sec. 213,
NIRC)

Q: May the taxpayer redeem his property after the

consummation of the sale?

A: Yes, within 1 year from the date of sale, the

taxpayer or anyone for him, may pay to the
Revenue District Officer the total amount of the
following:
1. Public taxes;
2. Penalties;
3. Interest from the date of delinquency to
the date of sale; and
4. Interest on said purchase price at the rate
of 15% per annum from the date of sale
to the date of redemption.

Note: If the property was forfeited in favor of the

government, the redemption price shall include only
the taxes, penalties and interest plus costs of sale
no
interest on purchase price since the Government did
not purchase the property, for it was forfeited. (Sec.
214, NIRC)

Q: Who is entitled to the possession of the

property levied?

A: The owner shall not be deprived of the property

until the expiration of the redemption period and
shall be entitled to rents and other income until the
expiration of the period for redemption. (Sec. 214,
NIRC)

Q: What is the effect of the redemption to the

property sold?

A: It shall entitle the taxpayer, the delivery of the

certificate issued to the purchaser and a certificate
from the Revenue District Officer that he has
redeemed the property. The Revenue District
Officer shall pay the purchaser the amount by
which such property has been redeemed and said
property shall be free from lien of such taxes and
penalties. (Sec. 214, NIRC)

Q: What are the similarities between distraint and

levy?

A:
1. Summary in nature
2. Requires notice of sale
3. May not be resorted to if the amount
involved is less than P100

Q: What are the distinctions among warrants of

distraint, levy and garnishment?

A:
DISTRAINT
LEVY
GARNISHMENT
Subject matter
Personal
property owned
by and in
possession of
the taxpayer
Real property
owned and in
the possession
of the taxpayer
Personal property
owned by the
taxpayer but in
the possession of
the third party
Acquisition by the Government
Personal
property
distrained are
purchased by
the Government
and resold to
meet deficiency
Real property
subject to levy is
forfeited to the
Government
then sold to
meet the
deficiency.
Personal property
garnished are
purchased by the
Government and
resold to meet
deficiency
Advertisement of Sale
No newspaper
publication
required

The sale of
realty subject to
levy is required
to be published
once a week for
3 consecutive
weeks in a
newspaper of
general
circulation in
the municipality
or city where
the property is
located.
No newspaper
publication
required

Q: Is the BIR authorized to issue a warrant of

garnishment against the bank account of a
taxpayer despite the pendency of taxpayer s
protest against the assessment with the BIR or
appeal with the CTA?

A: Yes, the BIR is authorized to issue a warrant of

garnishment against the bank account of a taxpayer
despite the pendency of protest. (Yabes v. Flojo, GR
L-46954 July 20, 1982) Nowhere in the Tax Code is
the CIR required to first, rule on the protest before
he can institute collection proceedings on the tax
assessed. The legislative policy is to give the CIR
much latitude in the speedy and prompt collection
of taxes because it is in taxation that the
Government depends to obtain the means to carry
on its operations. (1998 Bar Question)

Forfeiture

Q: Define forfeiture.

A: It is the divestiture of property without

compensation, in consequence of a default or
offense.

Q: What is done with the forfeited property?

A: Property forfeited is transferred to another

without consent of the defaulting taxpayer or
wrongdoer.

Q: How is forfeiture enforced?

A:
1. In case of personal property
By seizure
and sale or destruction of property (Secs.
224 and 225, NIRC)
2. In case of real property By judgment of
condemnation and sale in a legal action or
proceeding (Sec. 224, NIRC)

Q: What is the effect of forfeiture?

A: Forfeiture transfers the title to the specific thing

from the owner to the government. Also there
would no longer be any further levy for such would
be for the total satisfaction of the tax due. (Sec 215,
NIRC)

Q: What is the difference between forfeiture and

seizure to enforce a tax lien?

A:
FORFEITURE
SEIZURE
Ownership
Ownership is transferred
to the Government
Taxpayer retains
ownership of property
seized

Disposition of the proceeds of sale

Excess not returned to
the taxpayer
Excess returned to
taxpayer

Q: What are the rules governing forfeiture?

A:
1. If there is no bidder in the public sale or if
the amount of the highest bid is
insufficient to pay the taxes, penalties and
costs, the real property shall be forfeited
to the government.
2. The Register of Deeds shall transfer the
title of forfeited property to the
Government without necessity of a court
order.
3. Within 1 year from the date of sale, the
property may be redeemed by the
delinquent taxpayer or any one for him,
upon payment of taxes, penalties and
interest thereon and cost of sale; if not
redeemed within said period, the
forfeiture shall become absolute. (Sec.
215, NIRC)

Further Distraint and Levy

Q: Can there be further distraint?

A: The remedy of distraint and levy may be

repeated if necessary until the full amount of the
tax delinquency due including all expenses is
collected from the taxpayer. (Sec. 217, NIRC)
Otherwise, a clever taxpayer who is able to conceal
most of the valuable part of his property would
escape payment of his tax liability by sacrificing an
insignificant portion of his holdings.

Note: Further distraint and levy does not apply when

the real property was forfeited to the government for
it is in satisfaction of the claim in question. (Sec 215,
NIRC)

Enforcement of Tax Lien

Q: What is meant by tax lien?

A: It is a legal claim or charge on property, personal

or real, established by law as a sort of security for
the payment of tax obligations.

Q: Is tax itself a lien?

A: Tax is not a lien even upon the property against

which it is assessed, unless expressly made so by
statute.

Q:What is the nature of tax lien?

A: It is enforced as payment of tax, interest,

penalties, costs upon the entire property and rights
to property of the taxpayer. However, to be valid

against any mortgagee, purchaser or judgment

creditor, notice of such lien has to be filed by CIR
with the Registry of Deeds. (Sec. 219, NIRC)

Note: A valid assessment is reuired to be issued before

a tax lien shall be annotated at the proper registry of
property.

Q: When is tax lien applied?

A:
1. With respect to personal property
Tax
lien attaches when the taxpayer neglects
or refuses to pay tax after demand and
not from the time the warrant is served
(Sec. 219, NIRC)
2. With respect to real property from time
of registration with the register of deeds.

Q: What happens to the residue?

A: It goes back to the taxpayer or owner of the

property.

Q: When is the tax lien extinguished?

A:
1. By payment orremission of the tax
2. By prescription of the right of government
to assess or collect
3. By failure to file notice of such tax lien in
the office of Register of Deeds
4. By destruction of property subject to tax
lien
5. By replacing it with a bond

Note: A buyer in an execution sale acquires only the

rights of the judgment creditor.

Q: Distinguish lien from distraint.

A:
LIEN
DISTRAINT
Directed against what?
The property subject to
the tax
Need not be directed
against the property
subject to tax
To whom directed?
The property itself
regardless of the present
owner of the property
The property should be
presently owned by the
taxpayer

Compromise and Abatement

Q: What is meant by compromise?

A: It is an agreement between two or more persons

who, amicably settle their differences on such
terms and conditions as they may agree on to avoid
any lawsuit between them. It implies the mutual
agreement by the parties in regard to the thing or
subject matter which is to be compromised.

It is a contract whereby the parties, by reciprocal

concessions avoid litigation or put an end to one
already commenced.

Q: When must compromise be made?

A:
1. Criminal cases
Compromise must be
made prior to the filing of the information
in court.
2. Civil cases Before litigation or at any
stage of the litigation, even during appeal,
although legal propriety demands that
prior leave of court should be obtained.

Q: What are the requisites for Compromise:

A:
1.
2.
be
3.
of

Tax liability of the taxpayer;

An offer of the taxpayer of an amount to
paid by him; and
The acceptance (the CIR or the taxpayer)
the offer in the settlement of the claim

Note: If the offer to compromise was rejected by the

taxpayer, the compromise penalty cannot be enforced
thru an action in court, or by distraint or levy. If the CIR
wants to enforce a penalty he must file a criminal
action in the courts. (CIR v. Abad GR L-19627, June 27,
1968)

Q: What are the cases which may be

compromised?

A: DAC3
1. Delinquent accounts
2. Cases under Administrative protest after
issuance of the Final Assessment Notice
to the taxpayer which are still pending in
the RO, RDO, Legal Service, Large
Taxpayer Service, Collection Service,
Enforcement Service, and other offices in
the National Office
3. Civil tax cases disputed before the courts
4. Collection cases filed in courts
5. Criminal violations except:
a. Those already filed in courts; and
b. Those involving criminal tax fraud.
(Sec.3, RR 30-2002)

Q: What are the cases which cannot be

compromised?

A: F3EW-CD
1. Criminal tax Fraud cases, confirmed as

such by the CIR or his duly authorized

representative.
2. Cases where Final reports of
reinvestigation or reconsideration have
been issued resulting to reduction in the
original assessment and the taxpayer is
agreeable to such decision by signing the
required agreement form for the purpose.
3. Cases which become Final and executory
after final judgment of a court, where
compromise is requested on the ground
of doubtful validity of the assessment.
4. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer.
5. Withholding tax cases, unless the
applicant
taxpayer invokes provisions of
law that cast doubt on the taxpayer s
obligation to withhold.
6. Criminal violations already filed in courts.
7. Delinquent accounts with duly approved
schedule of installment payments.

Note: The CTA may issue an injunction to prevent

the government from collecting taxes under a
compromise agreement when such would be
prejudicial to the government.

Q: What are the grounds for a compromise?

A:
1. Doubtful validity of assessment; or
2. Financial incapacity

Q: What are the requisites in order that

compromise settlement on the ground of financial
incapacity may be allowed?

A:
1. Clear inability to pay the tax; and
2. The taxpayer must waive in writing his
privilege of the secrecy of bank deposit
under RA 1405 or other general or special
laws, which shall constitute as the CIR s
authority to inquire into said bank

deposits (Sec. 6 [F], NIRC)

Q: When may an offer to compromise a delinquent

account or disputed assessment on the ground of
reasonable doubt as to the validity of the
assessment be accepted?

A: When:
1. The delinquent account or disputed
assessment is one resulting from a
jeopardy assessment.
2. The assessment seems to be arbitrary in
nature, appearing to be based on
presumptions and there is reason to
believe that it is lacking in legal and/or
factual basis.
3. The taxpayer failed to file an
administrative protest on account of the
alleged failure to receive notice of
assessment and there is reason to believe
that the assessment is lacking in legal
and/or factual basis.
4. The taxpayer failed to file a request for
reinvestigation/reconsideration within 30
days from receipt of final assessment
notice and there is reason to believe that
the assessment is lacking in legal and/or
factual basis.
5. The taxpayer failed to elevate to the CTA
an adverse decision of the CIR, or his
authorized representative, in some cases,

within 30 days from receipt thereof and

there is reason to believe that the
assessment is lacking in legal and/or
factual basis.
6. Assessments made based on the Best
Evidence Obtainable Rule and there is
reason to believe that the same can be
disputed by sufficient and competent
evidence.
7. Assessment was issued within the
prescriptive period for assessment as
extended by the taxpayer s execution of
waiver of the Statute of Limitations the
validity or authenticity of which is being
questioned or at issue and there is strong
reason to believe and evidence to prove
that it is not authentic. (Sec. 3.1, RR 302002)

Q: Define compromise penalty.

A: It is a certain amount of money paid in lieu of

criminal prosecution and cannot be imposed in the
absence of a showing that the taxpayer consented
thereto.

Q: When must compromise be entered into?

A: It must be entered into prior to the institution of

the corresponding criminal action arising out of a
violation of the provisions of the Tax Code. A
compromise can never be entered into after final
judgment because by virtue of such final judgment
the Government had already acquired a vested
right. (Roviro v. Amparo, G.R. L- 5482, May 5, 1982)

Note: A compromise validly entered into between the

CIR and the taxpayer prior to the institution of the
corresponding criminal action arising out of a violation
of the provisions of the Tax Code becomes a bar to
such criminal action. (People v. Magdaluyo, GR L16235, Apr. 20,1965)

Q: Who may compromise tax cases?

A:
1. The CIR may compromise with respect to
criminal and civil cases arising from
violations of the NIRC as well as the
payment of any internal revenue tax
when:

a. A reasonable doubt as to the validity

of the claim against the taxpayer
exists provided that the minimum
compromise entered into is
equivalent to 40% of the basic tax; or
b. The financial position of the taxpayer
demonstrates a clear inability to pay
the assessed tax provided that the
minimum compromise entered into
is equivalent to 10% of the basic
assessed tax.

Note: In these instances, the CIR is allowed

to enter into a compromise only if the basic
tax involved does not exceed P1M and the
settlement offered is not less than the
prescribed percentages. (Sec. 204 [A], NIRC)
If the basic tax involves exceeds P1 million
or when the settlement offered is less than
the prescribed minimum rates the approval
of the Evaluation Board is needed.

A preliminary compromise may be entered

into by subordinate officials subject to
review by the CIR.

2. The Regional Evaluation Board (REB) may

compromise:
a. Tax assessments by revenue officers
involving basic deficiency taxes of
P500,000 or less; and
b. For minor criminal violations (RR 72001)

Note: The REB shall becomposed of:

a. The Regional Director as Chairman;
b. The Assistant Regional Director;

c. Chief, Legal Division;

d. Chief, Assessment Division;
e. Chief, Collection Division; and
f. Revenue District Officer having
jurisdiction over the taxpayer-applicant

Q: What is the extent of Commissioner s power to

compromise criminal violations?

A:
1. Before the complaint is filed with the
Prosecutor s Office
full discretion to
compromise except those involving fraud;

2. After the complaint is filed with the

Prosecutor s Office but before the
information is filed with the court
can
still compromise provided that the
prosecutor gives his consent;

3. After the information is filed with the

court no longer permitted to
compromise with or without the consent
of the Prosecutor. (People v. Magdaluyo,
GR L-1595, Apr. 20, 1961)

Q: Can the court compel the CIR to compromise in

cases when such is allowed?

A: No, to assure that no improper compromise is

made to the prejudice of the Government.

Q: What are the limitations on the power to

compromise a tax liability?

A:
1. Minimum compromise rate:
a. In case of financial incapacity, 10% of
basic assessed tax
b. In other cases, 40% of basic assessed
tax

2. Subject to approval of Evaluation Board:

a. When basic tax involved exceeds
P1,000,000
b. Where the settlement offered is less
than the prescribed minimum rates.
(Sec. 204, NIRC)
c. When the CIR is not authorized to
compromise

Note: The minimum compromise rate may be less than

the prescribed rates, as the case may be, provided it is
approved by the Evaluation Board.

Q: What are the remedies in case the taxpayer

refuses or fails to follow the tax compromise?

A:
1. Enforce the compromise
a. If it is a judicial compromise, it can
be enforced by mere execution. A
judicial compromise is one where a
decision based on the compromise
agreement is rendered by the court
on request of the parties.
b. Any other compromise is
extrajudicial and like any other
contract can only be enforced by
court action.

2. Regard it as rescinded and insist upon

original demand (Art. 2041, Civil Code)

Q: What is the prescriptive period to enforce

compromises?

A: As a rule, the obligation to pay tax is based on

law. But when, for instance, a taxpayer enters into a
compromise with the BIR, the obligation of the
taxpayer becomes one based on contract.
Compromise is a contract whereby the parties, by
reciprocal concessions, avoid litigation or put an
end to one already commenced. (Art. 2028 NCC)
Since it is a contract, the prescriptive period to
enforce the same is 10 years based on Art. 1144
NCC reckoned from the time the cause of action
accrued.

Q: What is meant by abatement of tax liability?

A: It is the cancellation of a tax liability.

Q: Differentiate compromise from abatement.

A: Compromise involves a reduction of the

taxpayer s liability, while abatement means that the
entire tax liability of the taxpayer is cancelled.

Q: When is the CIR authorized to abate or cancel a

tax liability?

A:
1. The tax or any portion thereof appears to
be unjustly or excessively assessed; or
2. The administration and collection costs
involved do not justify the collection of
the amount due. (Sec. 204[B], NIRC)

Q: What are the instances when the tax liabilities,

penalties and/or interest imposed on the taxpayer
may be abated on the ground that the imposition
thereof is unjust or excessive?

A: When: [W-SLICE]
1. The filing of the return/payment is made
at the Wrong venue.

2. The taxpayer fails to file the return and

pay the tax on time due to:
a. Substantial losses from prolonged
labor dispute;
b. Force majeure;
c. Legitimate business reverses.

Note: The abatement shall only cover the

surcharge and the compromise penalty and
not the interest imposed under Sec. 249,
NIRC (also applicable in number 5)

3. There is Late payment of the tax under

meritorious circumstances (i.e. Failure to
beat bank cut-off time, surcharge
erroneously imposed.)

4. The assessment is brought about or

resulted from taxpayer s non-compliance
with the law due to a difficult
Interpretation of said law.

5. The taxpayer fails to file the return and

pay the correct tax on time due to
Circumstances beyond his control.

6. The taxpayer s mistake in payment of his

tax is due to Erroneous written official

advice of a revenue officer (Sec. 2, RR 132001)

7. Other similar or analogous cases.

Q: What are the instances when the tax liabilities,

penalties and/or interest imposed on the taxpayer
may be abated on the ground that tax
administration and collection costs are more than
the amount sought to be collected?

A: A-WORD
1. Abatement of penalties on assessment
confirmed by the lower court but
Appealed by the taxpayer to a higher
court.
2. Abatement of penalties on Withholding
tax assessment under meritorious
circumstances.
3. Abatement of penalties on assessment
reduced after Reinvestigation but
taxpayer is still contesting reduced
assessment.
4. Abatement of penalties on Delayed
installment payment under meritorious
circumstances.
5. Such Other circumstances which the CIR
may deem analogous to the enumeration
above (Sec. 3, RR 13-2001)

Q: Explain the extent of the authority of the CIR to

compromise and abate taxes?

A: The authority of the CIR to compromise

encompasses both civil and criminal liabilities of the
taxpayer. The civil compromise is allowed only in
cases: (1) where the tax assessment is of doubtful
validity, or (2) when the financial position of the
taxpayer demonstrates a clear inability to pay the
tax.

The compromise settlement of any tax liability shall

be subject to the following minimum amounts: (1)

ten percent (10%) of the basic assessed tax in case

of financial capacity; and (2) forty percent (40%) of
the basic assessed tax in other cases.
Where the basic tax involved exceeds P1 million or
where the settlement offered is less than the
prescribed minimum rates, the compromise shall be
subject to the approval of the Evaluation Board
which shall be composed of the CIR and the four (4)
Deputy Commissioners.

All criminal violations may be compromised except:

(1) those already filed in court, or (2) those
involving fraud.

The CIR may also abate or cancel a tax liability

when: (1) the tax or any portion thereof appears to
have been unjustly or excessively assessed; or (2)
the administrative and collection costs involved do
not justify collection of the amount due. (Sec. 204,
NIRC) (1996 Bar Question)

Q: May the CIR compromise the payment of

withholding tax where the financial position of the
taxpayer demonstrates a clear inability to pay the
assessed tax?

A: No, a taxpayer who is constituted as withholding

agent who has deducted and withheld at source the
tax on the income payment made by him holds the
taxes in trust for the government (Sec. 58 [D], NIRC)
and is obligated to remit them to the BIR. The
subsequent inability of the withholding agent to
pay/remit the taxes withheld is not a ground for
compromise because the withholding tax is not a
tax upon the withholding agent but it is only a
procedure for the collection of a tax. (1998 Bar
Question)

Q: May the tax liability of a taxpayer be

compromised during the pendency of an appeal?

A: Yes, as long as any of the grounds for a

compromise i.e.; doubtful validity of assessment
and financial incapacity of taxpayer is present. A
compromise of a tax liability is possible at any stage
of litigation, even during appeal, although legal
propriety demands that prior leave of court should

be obtained. (Pasudeco v. CIR, GR L-39387, June 29,

1982) (1996 Bar Question)

Q: After the tax assessment had become final and

unappealable, the CIR initiated the filing of a civil
action to collect the tax due from NX. After several
years, a decision was rendered by the court
ordering NX to pay the tax due plus penalties and
surcharges. The judgment became final and
executory, but attempts to execute the judgment
award were futile.

Subsequently, NX offered the CIR a compromise

settlement of 50% of the judgment award,
representing that this amount is all he could really
afford. Does the CIR have the power to accept the
compromise offer? Is it legal and ethical?

A: Yes, the CIR has the power to accept the offer of

compromise if the financial position of the taxpayer
clearly demonstrates a clear inability to pay the tax.
(Sec. 204, NIRC)

As represented by NX in his offer, only 50% of the

judgment award is all he could really afford. This is
an offer for compromise based on financial

incapacity which the CIR shall not accept unless

accompanied by a waiver of the secrecy of bank
deposits. (Sec. 6 [F], NIRC) The waiver will enable
the CIR to ascertain the financial position of the
taxpayer, although the inquiry need not be limited
only to the bank deposits of the taxpayer but also
as to his financial position as reflected in his
financial statements or other records upon which
his property holdings can be ascertained.

If indeed, the financial position of NX as determined

by the CIR demonstrates a clear inability to pay the
tax, the acceptance of the offer is legal and ethical
for the ground upon which the compromise was
anchored is within the context of the law and the
rate of compromise is well within and far exceeds
the minimum prescribed by law which is only 10%
of the basic tax assessed. (2004 Bar Question)

Q: Distinguish Compromise from Abatement.

A:
Compromise
Abatement
Involves a reduction of
the taxpayer s liability.
Involves the cancellation of
the entire tax liability of a
taxpayer.
Officers authorized to
compromise: CIR and
Regional Evaluation
Board
Officer authorized to abate
or cancel tax, penalties
and/or interest: CIR
Grounds:
2. Reasonable doubt
as to the validity of
assessment;
3. Financial
incapacity of the
taxpayer

Grounds:
1. The tax or any portion
thereof appears to be
unjustly or excessively
assessed; or
2. The administration and
collection costs
involved do not justify
the collection of the
amount due.

JUDICIAL REMEDIES

Q: What are the judicial remedies available to the

government?

A:
1. Ordinary civil action
2. Criminal action

Q: What are the guidelines that must be observed

with respect to judicial remedies?

A:
GOVERNMENT

TAXPAYER
If express

1. Must follow and

observe the legal
parameters set forth
in the law. (e.g. An
action for collection
by the BIR (Sec. 205,
NIRC) must be filed
within the
prescriptive period
(Sec. 222, NIRC);

2. Must be approved by
the CIR (Sec. 220,
NIRC)

Judicial remedies are

exclusive. Thus, the CIR
decision must be
appealed to the CTA and
the CTA en banc decision
must be appealed to the
SC.

If implied
May avail of the usual
judicial remedies for

convenience and
expediency.
May resort to the laws of
general application. Thus,
a declaratory relief may
be availed of if the law
does not provide for
judicial remedies.

Q: Whose approval is needed for the filing of the

judicial remedies in court?

A: No civil or criminal action for the recovery of

taxes or the enforcement of any fine, penalty or
forfeiture under the NIRC shall be filed in court
without the approval of the CIR. (Sec. 220 NIRC)
Regional Directors may approve the filing of such if
this power is expressly delegated to him by the CIR.
(Sec. 7, NIRC)

Civil Action.

Q: Define civil action.

A: For tax remedy purposes, these are actions

instituted by the government to collect internal
revenue taxes in the regular courts after
assessment by CIR has become final and executory.

It includes, however, the filing by the government

of claims against the deceased taxpayer with the
probate court.

Q: What are the two ways to enforce civil liability

through civil actions?

A:
1. By filing a civil case for collection of a sum
of money with the proper regular court; or
2. By filing an answer to the petition for
review filed by taxpayer with CTA

Q: When is civil action resorted to?

A: It is resorted to when a tax liability becomes

collectible. It is collectible:
1. When tax is assessed and the assessment
became final and executory because the
taxpayer fails to file a protest with the CIR
within 30 days from receipt.
2. When a protest against assessment is
filed and a decision of the CIR was
rendered but the said decision became
final, executory and demandable for
failure of the tax payer to appeal the
decision to the CTA within 30 days from
the receipt of the decision.
3. When the protest is not acted upon by
the CIR within 180 days from the
submission of the documents and the
taxpayer failed to appeal with the CTA
within 30 days from the lapse of the 180
days period. (Sec. 228, NIRC)

Note: In the case of a false or fraudulent return

with intent to evade tax or of failure to file a
return, a proceeding in court for the collection of
such tax may be filed without assessment, at any
time within 10 years after the discovery of the
falsity, fraud or omission. (Sec. 222 [a], NIRC)

Q: What is the form and mode of proceeding?

A:
1. Civil actions shall be brought in the name
of the Government of the Philippines.
2. It shall be conducted by legal officers of
the BIR.
3. The approval by the Solicitor General
together with the approval of the CIR for

civil actions for collection of delinquent

taxes is required before they are filed.
(Sec. 220 NIRC)

Note: BIR legal officers deputized as Special

Attorneys who are stationed outside Metro
Manila may file verified complaints with the
approval of the Solicitor General. Provided that a
copy of the complaint is furnished to the Solicitor
General. The Solicitor General must file a notice
of appearance in the court where it was filed.

Q: Where to file civil actions?

A:
1. CTA - where the principal amount of taxes
and fees, exclusive of charges and
penalties claimed is P1 million and above;

2. RTC, MTC, MeTC - where the principal

amount of taxes and fees, exclusive of
charges and penalties claimed is less than
P1 million. (Sec. 7, R.A. 9282)

COURTS
AMOUNT OF TAXES
INVOLVED
Municipal Trial Courts
outside Metro Manila
Amount does not exceed
300,000
Municipal Trial Courts
within Metro Manila
Amount does not exceed
400,000
Regional Trial Courts
outside Metro Manila

300,001 to 999,999
Regional Trial Courts
within Metro Manila
400,001 to 999,999

Q: What is the effect of filing a civil action?

A: Once an action is filed with the regular courts,

the taxpayer can no longer assail the validity or
legality of assessment.

Q: On Mar. 15, 2000, the BIR issued a deficiency

income tax assessment for the taxable year 1997
against the Valera in the amount of P10 million.
Counsel for Valera protested the assessment and
requested a reinvestigation of the case. During the
investigation, it was shown that Valera had been
transferring its properties to other persons. As no
additional evidence to dispute the assessment had
been presented, the BIR issued on June 16, 2000
warrants of distraint and levy on the properties
and ordered the filing of an action in the RTC for
the collection of the tax. Counsel for Valera filed
an injunctive suit in the RTC to compel the BIR to
hold the collection of the tax in abeyance until the
decision on the protest was rendered.
1. Can the BIR file the civil action for collection,
pending decision on the administrative
protest?
2. As counsel for Valera, what action would you
take in order to protect the interest of your
client?

A:
1. Yes, because there is no prohibition for
this procedure considering that the filing
of a civil action for collection during the
pendency of an administrative protest
constitutes the final decision of the CIR on

the protest in denying the same. (CIR v.

Union Shipping Corp., GR 66160, May 21,
1990)

2. I will wait for the filing of the civil action

for collection and consider the same as an
appealable decision. Injunctive suit is not
an available remedy. I would then appeal
the case to the CTA and move for the
dismissal of the collection case with the
RTC. Once the appeal to the CTA is filed
on time, the CTA has exclusive jurisdiction
over the case. Hence, the collection case
in the RTC should be dismissed. (Yabes v.
Flojo, GR L-46954, July 20, 1982)

Criminal Action

Q: What is the purpose for filing a criminal

complaint?

A: Criminal complaint is instituted not to demand

payment but to penalize taxpayer for the violation
of the NIRC.

Q: What is the nature of this remedy?

A: Criminal action is resorted to not only for

collection of taxes but also for enforcement of
statutory penalties of all sorts.

Q: What are the two common crimes punishable

under the NIRC?

A:
1. Willful attempt to evade or defeat tax
(Sec. 254, NIRC)
2. Failure to file return, supply correct and
accurate information, pay tax, withhold
and remit tax and refund excess taxes
withheld on compensation (Sec. 255,
NIRC)

Q: Where is it filed?

A: The criminal charge is filed directly with the

Department of Justice with the approval of the CIR.

Q: Where should the information be filed?

A:
1. CTA - on criminal offenses arising from
violations of the NIRC or Tariff and
Customs Code and other laws
administered by the BIR and the BOC
where the principal amount of taxes and
fees, exclusive of charges and penalties
claimed is P1 million and above.

2. RTC, MTC, MeTC - on criminal offenses

arising from violations of the NIRC or
Tariff and Customs Code and other laws
administered by the BIR and the BOC
where the principal amount of taxes and
fees, exclusive of charges and penalties
claimed is less than P1 million. (Sec. 7, RA
9282)

Q: Does acquittal in the criminal action on tax

liability exonerate the taxpayer from payment of
civil liability to pay tax?

A: No. Generally it is the criminal liability that would

give rise to the civil liability, but in tax cases the
criminal liability arises from the act of not paying
the tax due which occurred first. The basis of the
civil liability is not from the criminal liability but
from the act of not paying the tax. Thus, the
exoneration from criminal action will not exonerate
the taxpayer from its civil liability. (Republic v.
Patanao, GR L-22356, July 21, 1967)

Q: What is the effect of the subsequent

satisfaction of civil liability?

A: The subsequent satisfaction of civil liability by

payment or prescription does not extinguish the
taxpayer s criminal liability.

Q: Can there be subsidiary imprisonment in case

the taxpayer is insolvent?

A: In case of insolvency on the part of the taxpayer,

subsidiary imprisonment cannot be imposed as
regards the tax which he is sentenced to pay.
However, it may be imposed in cases of failure to
pay the fine imposed. (Sec. 280, NIRC)

Q: May a criminal action be filed despite the lapse

of the period to file a civil action for collection of
taxes?

A: Yes, provided that the criminal action is

instituted within 5 years from the commission of
the violation or from the discovery thereof,
whichever is later. Also the two have different
prescriptive periods and such period would run
independently from each other.

Q: Is assessment necessary before a taxpayer may

be prosecuted for willfully attempting in any
manner to evade or defeat any tax imposed by the
NIRC?

A: No, provided there is a prima facie showing of a

willful attempt to evade taxes as in the taxpayer s
failure to declare a specific item of taxable income
in his income tax returns. A crime is complete when
the violator has knowingly and willfully filed a

fraudulent return with intent to evade and defeat

the tax. (Ungab v. Cusi, GR L-41919-24, May 30,
1980) (1998 Bar Question)

Q: Mr. Chan, a manufacturer of garments, was

investigated for failure to file tax returns and to
pay taxes. Despite the subpoena duces tecum
issued to him, he refused to submit his books of
accounts and allied records. Investigators, raided
his factory and seized several bundles of
manufactured garments, supplies and unpaid
imported textile materials. After his apprehension
and based on the testimony of a former employee,
deficiency income and business taxes were
assessed against Mr. Chan. It was then that he
paid the taxes. Action was instituted against him
in the RTC for violation of the NIRC. Mr. Chan
demanded the return of the garments and
materials seized from his factory on the ground
that he had already paid the taxes assessed
against him. How will you resolve Mr. Chan's
motion?

A: The garments and materials seized from the

factory should be ordered returned because the
payment of the tax had released them from any lien
that the Government has over them. (2002 Bar
Question)

Q: The BIR filed before the DOJ a criminal

complaint against a corporation and its officers for
alleged evasion of taxes. The complaint was
supported by a sworn statement of the BIR
examiners showing the computation of the tax
liabilities of the erring taxpayer. The corporation
filed a motion to dismiss the criminal complaint on
the ground that no assessment of its tax liability
has been done. The DOJ denied the motion on the
ground that the joint affidavit of the BIR
examiners may be considered as an assessment of
the tax liability of the corporation. Is the ruling of
the DOJ correct?

A: No, the DOJ is incorrect when it ruled that the

joint affidavit of the BIR examiners may be
considered as an assessment of the tax liability of
the corporation. The joint affidavit showing the
computation of the tax liabilities of the erring
taxpayer is not a tax assessment for it was not sent
to the taxpayer and does not demand payment of
the tax within a certain period of time. An

assessment is deemed made only when the BIR

releases, mails or sends such notice to the taxpayer.
(CIR v. Pascor Realty and Development Corp., GR
128315, June 29, 1999) (2005 Bar Question)

Q: Minolta is an EPZA-registered enterprise

enjoying preferential tax treatment under a
special law. After investigation of its withholding
tax returns for the taxable year 1997, the BIR
issued a deficiency withholding tax assessment in
the amount of P150.000. On May 15, 1999,
because of financial difficulty, the deficiency tax
remained unpaid, as a result of which the
assessment became final and executory. The BIR
also found that, in violation of the provisions of
the NIRC, Minolta did not file its final corporate
income tax return for the taxable year 1998,
because it allegedly incurred net loss from its
operations. On May 17, 2002, the BIR filed with
the RTC an action for collection of the deficiency
withholding tax for 1997.

1. Will the BIR's action for collection prosper? As

counsel of Minolta, what action will you take?
2. May criminal violations of the NIRC be
compromised? If Minolta makes a voluntary offer
to compromise the criminal violations for nonfiling and non-payment of taxes for the year 1998,
may the CIR accept the offer?

A:
1. Yes. BIR's action for collection will prosper
because the assessment is already final
and executory, it can already be enforced
through judicial action.

As counsel of Minolta, I will introduce

evidence that the income payment was
reported by the payee and the income tax
was paid thereon in 1997 so that my
client may only be allowed to pay the civil
penalties for non-withholding pursuant to
RMO 38-83.

2. All criminal violations of the NIRC may be

compromised except those already filed
in court or those involving fraud. (Sec.

204, NIRC) Accordingly, if Minolta makes a

voluntary offer to compromise the
criminal violations for non-filing and nonpayment of taxes for the year 1998, the
CIR may accept the offer which is allowed
by law. However, if it can be established
that a tax has not been paid as a
consequence of non-filing of the return,
the civil liability for taxes may be dealt
with independently of the criminal
violations. The compromise settlement of
the criminal violations will not relieve the
taxpayer from its civil liability. But the civil
liability for taxes may also be
compromised if the financial position of
the taxpayer demonstrates a clear
inability to pay the tax. (2002 Bar
Question)

Prescriptive Period for the

Filing of Criminal Action

Q: What is the prescriptive period for filing of a

criminal action?

A: The period is 5 years from commission or

discovery of the violation, whichever is later. (Sec.
281, NIRC)

The cause of action for willful failure to pay

deficiency tax occurs when the final notice and
demand for the payment thereof is served upon the
taxpayer.

The 5-year prescriptive period commences to run

only after receipt of the final notice and demand
and the taxpayer refuses to pay.

Note: In addition to the fact of discovery of the filing of

a fraudulent return, there must be a judicial
proceeding for the investigation and punishment of
the tax offense before the 5-year limiting period to
institute a criminal action for filing a fraudulent return
begins to run. The crime of filing false returns can be
considered "discovered" only after the manner of
commission, and the nature and extent of the fraud
have been definitely ascertained. Note the conjunctive
word and between the phrases the discovery
thereof and the institution of judicial proceedings for
its investigation and proceedings. (Lim, Sr. v. CA, GR
48134-37, Oct. 18, 1990)

Q: TY Corp. filed its final adjusted income tax

return for 1993 on Apr. 12, 1994 showing a net
loss. After investigation, the BIR issued a preassessment notice on Mar. 30, 1996. A final notice
and demand letter dated Apr. 15, 1997 was issued,
personally delivered to and received by the
company's chief accountant. For willful refusal and
failure of TY Corp. to pay the tax, warrants of
distraint and levy on its properties were issued
and served upon it. On Jan. 10, 2002, a criminal
charge for violation of the NIRC was instituted in
the RTC with the approval of the CIR.

The company moved to dismiss the criminal

complaint on the ground that an act for violation
of any provision of the NIRC prescribes after 5
years and, in this case, the period commenced to
run on Mar. 30, 1996 when the pre-assessment
was issued. How will you resolve the motion?

A: The motion to dismiss should not be granted. It is

only when the assessment has become final and
unappealable that the 5-year period to file a
criminal action commences to run. (Tupaz v. Ulep,
GR 127777, Oct. 1, 1999) The pre-assessment
notice issued on Mar. 30, 1996 is not a final
assessment which is enforceable by the BIR. It is the
issuance of the final notice and demand letter
dated Apr. 15, 1997 and the failure of the taxpayer
to protest within 30 days from receipt thereof that
made the assessment final and unappealable. The
earliest date that the assessment has become final
is May 16, 1997 and since the criminal charge was
instituted on Jan. 10, 2002, the same was timely
filed. (2002 Bar Question)

Q: Gerry was being prosecuted by the BIR for

failure to pay his income tax liability for calendar
year 1999 despite several demands by the BIR in
2002. The Information was filed with the RTC only
last June 2006. Gerry filed a motion to quash the
Information on the ground of prescription, the
Information having been filed beyond the 5-year
reglementary period. If you were the judge, will
you dismiss the Information?

A: No, the trial court can exercise jurisdiction.

Prescription of a criminal action begins to run from
the day of the violation of the law. The crime was
committed when Gerry willfully refused to pay
despite repeated demands in 2002. Since the
information was filed in June 2006, the criminal
case was instituted within the five-year period
required by law. (Tupaz v. Ulep, GR 127777, Oct. 1,
1999; Sec. 281, NIRC) (2006 Bar Question)

Statutory Offenses and Penalties

Civil Penalties

Q: What is the nature of civil penalties?

A: They are imposed in addition to the tax required

to be paid.

Surcharge

Q: What is a surcharge or surtax?

A: It is a civil penalty imposed by law as an addition

to the main tax required to be paid. It is a civil
administrative sanction provided as a safeguard for
the protection of the State revenue and to
reimburse the government for the expenses of
investigation and the loss resulting from the
taxpayer s fraud. A surcharge added to the main tax
is subject to interest.

Q: What are the corresponding rates of

surcharges?

A:
1. Twenty-five percent (25%) of the amount
due, in the following cases: F-TOP

a. Failure to File any return and pay the

tax due thereon as required under
the provisions of the NIRC or rules
and regulations on the date
prescribed
b. Failure to pay the deficiency tax
within the Time prescribed for its
payment in the notice of assessment
c. Unless otherwise authorized by the
CIR, filing a return with an internal
revenue officer Other than those
with whom the return is required to
be filed
d. Failure to Pay the full or part of the
amount of tax shown on any return
required to be filed under the
provisions of the NIRC or rules and
regulations, or the full amount of tax
due for which no return is required
to be filed, on or before the date
prescribed for its payment (Sec 248
[A], NIRC)

2. The penalty shall be fifty percent (50%) of

the tax or of the deficiency tax, in the
following cases:
a. Willful neglect to file the return
within the period prescribed; or
b. False or fraudulent return is willfully
made (Sec. 248 [B], NIRC)

Q: When is a return deemed false or fraudulent?

A: A prima facie evidence of false or fraudulent

return arises when there is: under-over
1. A substantial under declaration of taxable
sales, receipts or income; or
2. A substantial overstatement of
deductions (Sec. 248, NIRC)

Q: When is there a substantial underdeclaration of

taxable sales, receipts or income?

A: When there is failure to report sales, receipts or

income in an amount exceeding 30% of that
declared per return.

Q: When is there a substantial overstatement of

deductions?

A: There is a substantial overstatement of

deductions where a claim of deduction exceeds 30%
of actual deductions.

Q: Businessman Lincoln filed an income tax return

for 1993 showing business net income of P350,000
on which he paid an income tax of P61,000. After
filing the return he realized that he forgot to
include an item of business income in 1993 for
P50.000. Being an honest taxpayer, he included
this income in his return for 1994 and paid the
corresponding income tax thereon. In the
examination of his 1993 return the BIR examiner
found that Lincoln failed to report this item of
P50.000 and assessed him a deficiency income tax
on this item, plus a 50% fraud surcharge.

1. Is the examiner correct?

2. If you were the lawyer of Lincoln, what would
you have advised your client before he
included in his 1994 return the amount of
P50.000 as 1993 income to avoid the fraud
surcharge?
3. Considering that Lincoln had already been
assessed a deficiency income tax for 1993 for
his failure to report the P50.000 income, what
would you advise him to do to avoid the
penalties for tax delinquency?
4. What would you advise Lincoln to do with
regard to the income tax he paid for the
P50.000 in his 1994 return? In case your
remedy fails, what is your other recourse?

A:

1. The examiner is correct in assessing a

deficiency income tax for taxable year
1993 but not in imposing the 50% fraud
surcharge. The amount of all items of
gross income must be included in gross
income during the year in which received
or realized. (Sec. 38, NIRC) The 50% fraud
surcharge attaches only if a false or
fraudulent return is willfully made by
Lincoln. (Sec.248, NIRC) The fact that
Lincoln included it in his 1994 return
belies any claim of willfulness but is
rather indicative of an honest mistake
which was sought to be rectified by a
subsequent act that is the filing of the
1994 return.

2. Lincoln should have amended his 1993

income tax return to allow for the
inclusion of the P50,000 income during
the taxable period it was realized.

3. Lincoln should file a protest questioning

the 50% surcharge and ask for the
abatement thereof.

4. Lincoln should file a written claim for

refund with the CIR of the taxes paid on

the P50.000 income included in 1994
within 2 years from payment pursuant to
Sec. 204 [3] of the NIRC. Should this
remedy fail in the administrative level, a
judicial claim for refund can be instituted
before the expiration of the 2 year period.
(1995 Bar Question)

Interest

Q: Are there interests to be paid in addition to the

tax?

A: Yes, there shall be assessed and collected on any

unpaid amount of tax, interest at the rate of 20%
per annum, or such higher rate as may be
prescribed by rules and regulations, from the date
prescribed for payment until the amount is fully
paid. (Sec. 249, NIRC)

Deficiency Interest

Q: What is Deficiency Interest?

A: Any deficiency in the tax due, as the term is

defined in the NIRC, shall be subject to the interest
prescribed in subsec. A hereof, which interest shall
be assessed and collected from the date prescribed
for payment until the amount is fully paid (Sec. 249,
NIRC)

Delinquency Interest

Q: What is Delinquency Interest?

A: In case of failure to pay:

1. The amount of the tax due on any return
required to be filed; or
2. The amount of the tax due for which no
return is required; or
3. A deficiency tax, or any surcharge or
interest thereon on the due date
appearing in the notice and demand of
the CIR,

There shall be assessed and collected on the unpaid

amount, interest at the rate prescribed in subsec. A
hereof until the amount is fully paid, which interest
shall form part of the tax. (Sec. 249, NIRC)

Interest on Extended Payment

Q: What is interest on extended payment?

A: If any person required to pay the tax is qualified

and elects to pay the tax on installment under the
provisions of the NIRC, but fails to pay the tax or
any installment hereof, or any part of such amount
or installment on or before the date prescribed for
its payment, or where the CIR has authorized an
extension of time within which to pay a tax or a
deficiency tax or any part thereof, there shall be
assessed and collected interest at the rate
hereinabove prescribed on the tax or deficiency tax
or any part thereof unpaid from the date of notice
and demand until it is paid.

*See discussion on Compromise and Abatement

Organization and Function of the BIR

Tax Administration

Q: What is tax administration?

A: It refers to the manner and procedure of

assessing and collecting or enforcing tax liabilities.

Q: What are the powers and duties of the BIR?

A:
1. Assessment and collection of all national
internal revenue taxes, fees and charges;
2. Enforcement of all forfeitures, penalties
and fines;
3. Execution of judgments in all cases
decided in its favor (by the CTA and
regular courts);
4. Give effect and administer the
supervisory and police powers conferred
to it by the NIRC and other laws.
5. Recommend to the Secretary of Finance
all needful rules and regulations for the
effective enforcement of the provision of
the NIRC.

Q: Is the BIR authorized to collect estate tax

deficiencies by the summary remedy of levy upon
and sale of real properties of the decedent
without first securing the authority of the court
sitting in probate over the supposed will of the
decedent?

A:Yes, the BIR is authorized to collect estate tax

deficiency through the summary remedy of levying
upon and sale of real properties of a decedent
without the cognition and authority of the court
sitting in probate over the supposed will of the
deceased because of the collection of estate tax is
executive in character. As such the estate tax is

exempted from the application of the statute of

non-claims, and this is justified by the necessity of
government funding, immortalized in the maxim
that taxes are the lifeblood of the government.
(Marcos v. CIR, GR 120880, June 5, 1997) (1998 Bar
Question)

Q: Who are the Chief Officials of the BIR?

A: The BIR is headed by the CIR and 6 Deputy

Commissioners, who lead the following divisions:
1.
2.
3.
4.
5.
6.

Operations group
Legal Inspection Group
Resource and Management Group
Information Systems Group
Prosecution Group
Special Concerns Group

Q: What are the powers of the Commissioner?

A: DO TIRE, RAID PIA

1. Decide disputed assessments, refunds of

internal revenue taxes, fees, charges and
penalties in relation thereto or other
matters related to it subject to the
exclusive appellate jurisdiction of the
CTA;

Note: RR 12-99 - Power to decide disputed

assessments may also be exercised by
Regional Directors.

2. To Obtain information, summon,

examine and take testimony of persons.

3. To Terminate taxable period for reasons

provided in the NIRC;

4. To Interpret provisions of the NIRC and

other tax laws subject to review by the
Secretary of Finance;

5. To make or amend Return in case

taxpayer fails to file a return or files a
false or fraudulent return;

6. To Examine returns and determine tax

due;

7. To prescribe any additional Requirements

for the submission or preparation of
financial statements accompanying tax
returns;

8. To make Assessments, prescribe

additional requirements for tax
administration and purposes;

9. To Inquire into bank deposits of

a. Decedent to determine his gross
income;
b. A taxpayer who filed application to
compromise payment of tax liability
by reason of financial incapacity;
c. A specific taxpayer or taxpayers
subject of a request for the supply of
tax information from a foreign tax
authority pursuant to an
international convention or
agreement on tax matters to which
the Philippines is a signatory or a
party of. Provided, That the
information obtained from the
banks and other financial
institutions may be used by the BIR
for tax assessment, verification,
audit and enforcement purposes;

10. To Delegate powers vested upon him to

subordinate officials with rank equivalent
to Division Chief or higher, subject to
limitations and restrictions imposed
under the rules and regulations.

11. To Prescribe real property values;

12. To take Inventory of goods of any

taxpayer, and place any business under
observation or surveillance IF there is
reason to believe that such is not
declaring his correct income, sales or
receipts for tax purposes;

13. To register tax Agents;

Q: What are the purposes of these powers?

A:
1. To ascertain correctness of the return;
2. To make a return when none has been
made;
3. To determine liability of any person for
any internal revenue tax;
4. To collect such liability;
5. To evaluate tax compliance.

Q: What is the scope of such powers?

A:
1. To examine any book, paper, record or
other data which may be relevant or
material to such inquiry;
2. To obtain any information (costs, volume
of production, receipts, sales, gross

income) on a regular basis, from any

person other than the person under

investigation and any office or officer of

the national/local government;
3. To summon the following to produce
records and to give testimony:
a. The person liable for tax or required
to file a return;
b. Any officer or employee of such
person;
c. Any person having in his possession,
custody and care the books of
accounts, accounting records of
entries related to the business of
such taxpayer.

Q: What are the powers of the BIR which cannot

be delegated?

A: RICA
1. To Recommend promulgation of rules
and regulations by the Secretary of
Finance;
2. To Issue rulings of first impression or to
reverse, revoke or modify any existing
rule of the BIR;
3. To Compromise or abate any tax liability;

XPN: The Regional Evaluation Board may

compromise assessments involving
deficiency taxes of P500,000 or less and
minor crime violations.

4. To Assign or reassign internal revenue

officers to establishments where articles
subject to excise tax are kept.

Q: Will errors or mistakes of administrative

officials bind the government as to the collection
of taxes?

A:
GR: Errors or mistakes of administrative officials
(including the BIR) should never be allowed to
jeopardize the financial position of the
government since taxes are the lifeblood of the
nation through which the government agencies
continue to operate and with which the State
effects its functions for the welfare of its
constituents. (CIR v. Citytrust and CTA,
GR106611, July 21 ,1994)

XPN: For the purpose of safeguarding taxpayers

from any unreasonable examination,
investigation or assessment, our tax law provides
a statute of limitations in the collection of taxes.
Thus, the law on prescription, being a remedial
measure, should be liberally construed in order
to afford such protection. As a corollary, the
exceptions to the law on prescription should
perforce be strictly construed. (CIR v. Goodrich
Philippines Inc., GR 104171, Feb. 24, 1999)

Note: In the Citytrust case, which involves a claim for

refund, the error or neglect was the failure of the
Solicitor General to present its evidence, as counsel for
the CIR, due to the unavailability of the necessary
records from BIR, prompting the Solicitor to submit the
case for decision without presenting any evidence.
While in Goodrich, the error committed refers to the
neglect of the BIR to make assessment within the 3year period as required in Sec. 203, NIRC.

Rule-making Authority of the Secretary of Finance

Authority of Secretary of Finance to

Promulgate Rules and Regulations

Q: What law provides for the authority of the

Secretary of Finance to promulgate rules and
regulations?

A: Sec. 244 of the NIRC provides the authority for

the Secretary of Finance. It states, upon
recommendation of the CIR, the Secretary of
Finance shall promulgate all needful rules and
regulations for the effective enforcement of the
provisions of the NIRC.

Specific Provisions to be Contained in

Rules and Regulations

Q: What are the Provisions that need to be in the

Rules and Regulations?

A: It must contain provisions specifying, prescribing,

or defining: (Sec. 245, NIRC)
1. The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions to discover
persons and property liable to national
internal revenue taxes, and the manner
their lists and records of taxable persons
and taxable objects shall be made and
kept.
2. The forms of labels, brands or marks to be
required on goods subject to excise tax,
and the manner how the labelling,
branding or marking shall be effected.
3. The condition and manner for goods
intended for export, which if not exported
would be subject to an excise tax, shall be
labelled, branded or marked.
4. The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings;

5. The conditions under which goods

intended for storage in bonded
warehouses shall be conveyed thither,
their manner of storage and method of
keeping entries and records, also the
books to be kept by Revenue Inspectors
and the reports to be made by them in
connection with their supervision of such
houses.
6. The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be
effected, so as to render the alcohol
suitably denatured and unfit for oral
intake, the bonds to be given, the books
and records to be kept, the entries to be
made therein, the reports to be made to
the CIR, and the signs to be displayed in
the business ort by the person for whom
such denaturing is done or by whom, such
alcohol is dealt in.
7. The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation, the manner in which the
proper books, records, invoices and other
papers shall be kept and entries therein
made by the person subject to the tax, as
well as the manner in which licenses and
stamps shall be gathered up and returned
after serving their purposes.
8. The conditions to be observed by revenue
officers respecting the enforcement of
Title III imposing a tax on estate of a
decedent, and other transfers mortis
causa, as well as on gifts and such other
rules and regulations which the CIR may
consider suitable for the enforcement of
the said Title III.
9. The manner tax returns, information and
reports shall be prepared and reported
and the tax collected and paid, as well as
the conditions under which evidence of
payment shall be furnished the taxpayer,
and the preparation and publication of
tax statistics.
10. The manner in which internal revenue
taxes, such as income tax, including
withholding tax, estate and donor's taxes,
value-added tax, other percentage taxes,
excise taxes and documentary stamp
taxes shall be paid through the collection
officers of the BIR or through duly
authorized agent banks which are hereby
deputized to receive payments of such
taxes and the returns, papers and

statements that may be filed by the

taxpayers in connection with the payment
of the tax:

Provided, however, that notwithstanding

the other provisions of the NIRC
prescribing the place of filing of returns
and payment of taxes, the CIR may, by
rules and regulations require that the tax
returns, papers and statements and taxes
of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks:
Provided, further, That the CIR can
exercise this power within 6 years from
the approval of RA 7646 or the
completion of its comprehensive
computerization program, whichever
comes earlier: Provided, finally, That
separate venues for the Luzon, Visayas
and Mindanao areas may be designated
for the filing of tax returns and payment
of taxes by said large taxpayers.

Q: What is a large taxpayer?

A: A taxpayer who satisfies any of the following

criteria:
1. For VAT - Business establishment with
VAT paid or payable of at least P100,000
for any quarter of the preceding taxable
year;

2. For Excise Tax - Business establishment

with excise tax paid or payable of at least
P1 million for the preceding taxable year;

3. For Corporate Income Tax - Business

establishment with annual income tax
paid or payable of at least P1 million for
the preceding taxable year; and

4. For Withholding Tax - Business

establishment with withholding tax
payment or remittance of at least P1
million for the preceding taxable year.

Provided, however, That the Secretary of Finance,

upon recommendation of the CIR, may modify or
add to the above criteria for determining a large
taxpayer after considering such factors as inflation,
volume of business, wage and employment levels,

and similar economic factors.

The penalties prescribed under Sec. 248 of the NIRC

shall be imposed on any violation of the rules and
regulations issued by the Secretary of Finance,

upon recommendation of the CIR, prescribing the

place of filing of returns and payments of taxes by
large taxpayers. (Sec. 245, NIRC)

Non-Retroactivity of Rulings

Q: How are the rulings of the BIR applied?

A: The rulings of the BIR are not retroactive. Any

revocation, modification or reversal of any of the
rules and regulations promulgated or any of the
rulings or circulars promulgated by the CIR shall not
be given retroactive application if it will be
prejudicial to the taxpayers, except in the following
cases:
1. Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith. (Sec.
246, NIRC)

Suspension of Business Operation

Q: When can the CIR suspend the business

operation of a taxpayer?

A:
1. In the case of VAT-registered person:
a. Failure to issue receipts or invoices;

b. Failure to file a VAT return as

required under Sec. 114; or
c. Understatement of taxable sales or
receipts by 30% or more of his
correct taxable sales or receipts for
the taxable quarter.

2. Failure of any person to Register as

required under Sec. 236:
The temporary closure of the
establishment shall be for the duration of
not less than 5 days and shall be lifted
only upon compliance with whatever
requirements prescribed by the CIR in the
closure order. (Sec. 115 NIRC)

LOCAL GOVERNMENT CODE OF 1991,

as amended

LOCAL TAXATION

Q: What are local taxes?

A: Taxes that are imposed and collected by the

local government units in order to raise revenues
to enable them to perform the functions for
which they have been organized.

Q: What are the fundamental principles of local

taxation?

A: The following fundamental principles shall

govern the exercise of the taxing and other
revenue-raising powers of local government
units: UE-LIP
1. Taxation shall be Uniform in each local
government unit;
2. Taxes, fees, charges and other
impositions shall: EPUC
a. be equitable and based as far as
practicable on the taxpayer's
ability to pay;
b. be levied and collected only for
public purposes;
c. not be unjust, excessive,
oppressive, or confiscatory;
d. not be contrary to law, public
policy, national economic policy, or
in the restraint of trade;
3. The collection of local taxes, fees,
charges and other impositions shall in
no case be Let to any private person;
4. The revenue collected pursuant to the
provisions of the LGC shall Inure solely
to the benefit of, and be subject to the
disposition by, the local government
unit levying the tax, fee, charge or other
imposition unless otherwise specifically
provided herein; and
5. Each local government unit shall, as far
as practicable, evolve a Progressive

system of taxation. (Sec. 130, LGC)

Note: The fundamental principles of taxation are

also known as the requisites of municipal taxation.

Q: The City of Makati, in order to solve the

traffic problem in its business districts, decided
to impose a tax, to be paid by the driver, on all
private cars entering the city during peak hours
from 8:00 a.m. to 9:00 a.m. from Mondays to
Fridays, but exempts those cars carrying more
than two occupants, excluding the driver. Is the
ordinance valid?
A: The ordinance is in violation of the Rule of
Uniformity and Equality, which requires that all
subjects or objects of taxation, similarly situated
must be treated in equal footing and must not
classify the subjects in an arbitrary manner. In
the case at bar, the ordinance exempts cars
carrying more than two occupants from coverage
of the ordinance. Furthermore, the ordinance
only imposes the tax on private cars and exempts
public vehicles from the imposition of the tax,
although both contribute to the traffic problem.
There exists no substantial standard used in the
classification by the City of Makati.

Another issue is the fact that the tax is imposed

on the driver of the vehicle and not on the
registered owner. The tax does not only violate
the requirement of uniformity, but the same is
also unjust because it places the burden on
someone who has no control over the route of
the vehicle. The ordinance is, therefore, invalid
for violating the rule of uniformity and equality
as well as for being unjust. (2003 Bar Question)

A city can validly tax the sales to customers

outside the city as long as the orders were
booked and paid for in the company s branch
office in the city. A different interpretation would
defeat the tax ordinance in question or
encourage tax evasion by simply arranging for
the delivery at the outskirts of the city.
(Philippine Match Company vs. City of Cebu, G.R.
No. L-30745, January 18, 1978)

NATURE OF LOCAL TAXING POWER

Grant of Local Taxing Power Under the Local

Government Code

Q: What are the sources of local taxing power?

A:
1. Art. X, Sec 5 of the 1987 Constitution Each local government unit shall have
the power to create their own sources
of revenue and to levy taxes, fees and
charges subject to such guidelines and
limitations as the Congress may provide
consistent with the basic policy of local
autonomy. Such taxes, fees and
charges shall accrue exclusively to the
local government.

2. Sec. 129 of the Local Government Code

(LGC) - Each local government unit
shall exercise its power to create its own
sources of revenue and to levy taxes,

fees and charges subject to the

provisions herein, consistent with the
basic policy of local autonomy. Such
taxes, fees and charges shall accrue
exclusively to the local government
units.

Q: Does the ARMM have the same source of

power as the LGUs?

A: No. The LGUs derive their power to tax from

Sec. 5, Article X of the 1987 Constitution. The
constitutional provision is self-executing. This is
applicable only to LGUs outside the Autonomous
Region namely the Muslim Mindanao and the
Cordilleras since the authority to tax the LGUs
within their region is delegated by the Organic Act
creating them.

Sec. 20, Article X of the 1987 Constitution

authorizes the Congress to pass the Organic Act
which shall provide for legislative powers over
creation of sources of revenues. This provision is
not self-executing unlike Sec. 5, Article X of the
Constitution.

Note: The LGU s power to tax is subject to such

guidelines and limitations as Congress may proved
while the Autonomous Region s power to tax is
based on the Organic Act which the Constitution
authorizes Congress to pass.

Q: What is the paradigm shift

government taxation?

in local

A: The power to tax is no longer vested

exclusively on Congress. Local legislative bodies
are now given direct authority to levy taxes, fees
and other charges pursuant to Art. X, Sec. 5 of the
Constitution. (NaPoCor v. City of Cabanatuan,
G.R. No. 149110, Apr. 9, 2003)

Q: What is the reason for the paradigm shift?

A: The paradigm shift results from the realization

that genuine development can be achieved only
by strengthening local autonomy and promoting
decentralization of governance. (Ibid.)

Q: What is the nature of the taxing power of the

provinces, municipalities and cities?

A: The taxing power of the provinces,

municipalities and cities is directly conferred by
the Constitution by giving them the authority to
create their own sources of revenue. The local
government units do not exercise the power to
tax as an inherent power or by a valid delegation
of the power by Congress, but pursuant to a
direct authority conferred by the Constitution.
(2007 Bar Question)

Q: May Congress, under the 1987 Constitution,

abolish the power to tax of local governments?

A: No. Congress cannot abolish what is expressly

granted by the fundamental law. The only
authority conferred to Congress is to provide the
guidelines and limitations on the local
government's exercise of the power to tax (Sec. 5,
Art. X, 1987 Constitution) (2003 Bar Question)

Note: The authority to tax of LGUs within the

Autonomous Regions (Muslim Mindanao and the
Cordilleras) is not delegated by the Constitution, but
by the Organic Act creating them.

Q: What are the characteristics of the taxing

power of LGUs?

A: DON2G
1. Not inherent May only be exercised if
delegated to them by national

legislature or conferred by the

Constitution itself.
2. Direct grant from the Constitution
While a direct grant, the same is subject
to limitations as may be set by
Congress.
3. Not absolute Subject to limitations and
guidelines as may be provided by law
such as progressivity etc.
4. Exercised by the sanggunian of the LGU
concerned through an appropriate
Ordinance.
5. Its application is bounded by the
Geographical limits of the LGU that
imposes the tax.

Q: What are the aspects of local taxation?

A:
1. Local Government Taxation (Sections
128-196, LGC)

2. Real Property Taxation (Sections 197283, LGC)

Local Government
Taxation
Real Property Taxation
Imposition of license,
taxes, fees and other
impositions, including
community tax.
System of levy on real
property imposed on a
country-wide basis but
authorizing, to a limited
extent and within certain
parameters, local
governments to vary the
rates of taxation

Authority to Prescribe Penalties for

Tax Violations

Q: What are the powers to prescribe penalties

for tax violations of the LGU?

A:
1. Limited as to the amount of imposable
fine as well as the length or period of
imprisonment;
2. The Sanggunian is authorized to
prescribe fines or other penalties for
violations of tax ordinances, but in no
case shall fines be less than P1,000 nor
more than P5,000 nor shall the
imprisonment be less than one (1)
month nor more than six (6) months;
3. Such fine or other penalty shall be
imposed at the discretion of the court;
4. The Sangguniang Barangay may
prescribe a fine of not less than P100
nor more than P1,000. (Sec. 516, LGC)

Authority to Grant Local Tax Exemptions

Q: May LGUs grant exemptions?

A: Yes. Local government units may, through

ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and
conditions as they may deem necessary. (Sec.
192, LGC)

The power to grant tax exemptions, tax incentives

and tax reliefs shall not apply to regulatory fees
which are levied under the police power of the
LGU.

Q: What are the guidelines for granting tax

exemptions, incentives and reliefs? (Rules and
Regulations Implementing the LGC, Sec. 282[b])

A:
1. Tax Exemptions and Reliefs
a. May be granted in cases of natural
calamities, civil disturbance,
general failure of crops or adverse
economic conditions such as
substantial decrease in prices of
agricultural or agri-based products;
b. The grant shall be through an
ordinance;
c. Any exemption or relief granted to
a type or kind of business shall
apply to all business similarly
situated;
d. The same may take effect only
during the calendar year not
exceeding 12 months as may be
provided in the ordinance; and
e. In case of shared revenues, the
relief or exemption shall only
extend to the LGU granting such.
2. Tax incentives:
a. Shall be granted only to new
investments in the locality and the
ordinance shall prescribe the terms
and conditions therefore;
b. The grant shall be for a definite
period not exceeding 1 calendar
year;
c. The grant shall be through an
ordinance passed prior to the 1st
day of January of any year; and
d. Tax incentive granted to a type or
kind of business shall apply to all
businesses similarly situated.

Q: When is tax exemption conferred?

A: Tax exemptions shall be conferred through the

issuance of a non-transferable tax exemption
certificate. (Article 283, IRR of LGC)

Q: The Local Government

January 1, 1992. PLDT s
granted sometime before
provides that PLDT will

Code took effect on

legislative franchise was
1992. Its franchise
pay only 3% franchise tax

in lieu of all taxes.

The legislative franchise of Smart and Globe

Telecoms were granted in 1998. Their legislative
franchises state that they will pay only 5%
franchise tax in lieu of all taxes.

The Province of Zamboanga del Norte passed an

ordinance in 1997 that imposes a local franchise
tax on all telecommunications companies
operating within the province. The tax is 50% of
1% of the gross annual receipts of the preceding
calendar year based on the incoming receipts, or
receipts realized, within its territorial
jurisdiction.

Is the ordinance valid? Are PLDT, Smart and

Globe liable to pay franchise taxes? Reason
briefly.

A: The ordinance is valid. The Local Government

Code explicitly authorizes provincial
governments, notwithstanding any law or other
special law, to impose a tax on business enjoying
a franchise at the rate of 50% of 1% based on the
gross annual receipts during the preceding year
within the province. (Section 137, LGC)

PLDT is liable to the franchise tax levied by the

province of Zamboanga del Norte. The tax
exemption privileges on franchises granted
before the passage of the Local Government Code
are effectively repealed by the latter law.
Congress, in approving Section 23 of R.A. No.
7925 (Public Telecommunications Act), did not
intend it to operate as a blanket exemption to all
telecommunications entities. The said provision
thus cannot be considered as having amended
petitioner s franchise so as to entitle it to
exemption from the imposition of local franchise
taxes. (PLDT v. City of Davao, G.R. No. 143867,
Aug. 22, 2002)

Smart and Globe, however, are not liable to the

franchise tax imposed on the provincial
ordinance. The legislative franchises of Smart and
Globe were granted in 1998, long after the Local
Government Code took effect. Congress is
deemed to have been aware of the provisions of
the earlier law when it granted the exemption.
Accordingly, the latest will of the legislature to
grant tax exemption must be respected. (2007
Bar Question)

Q: Is Smart Communications, Inc. (SMART)

exempt from local taxation?

A: Under its franchise, SMART is not exempt from

local business and franchise taxes. Moreover,
Section 23 of the Public Telecommunications Act
does not provide legal basis for Smart s
exemption from local business and franchises
taxes. The term exemption in Section 23 of the
Public Telecommunications Act does not mean
tax exemption; rather, it refers to exemption
from certain regulatory or reporting requirements
imposed by government agencies such as the
National Telecommunications Commission. The
thrust of the Public Telecommunications Act is to
promote the gradual deregulation of entry,
pricing, and operations of all public
telecommunications entities, and thus to level the
playing field in the telecommunications industry.
The language of Section 23 and the proceedings
of both Houses of Congress are bereft of anything
that would signify the grant of tax exemptions to
all telecommunications entities. Intent to grant
tax exemption cannot therefore be discerned
from the law; the term exemption is too
general to include tax exemption and runs
counter to the requirement that the grant of tax

exemption should be stated in clear and

unequivocal language too plain to be beyond
doubt or mistake. (The City of Iloilo v. Smart
Communications Inc., G.R. No. 167260, Feb. 27,
2009)

The in lieu of all taxes clause in a legislative

franchise should categorically state that the
exemption applies to both local and national
taxes; otherwise, the exemption claimed should
be strictly construed against the taxpayer and
liberally in favor of the taxing authority. (Smart
Communications, Inc., v. The City of Davao, G.R.
No. 155491, Jul. 21, 2009)

Withdrawal of Exemptions

Q. What privileges were withdrawn upon the

effectivity of the LGC?

A:
GR: Tax exemptions or incentives granted to
or enjoyed by all persons, whether natural or
juridical, including government-owned or
controlled corporations are hereby withdrawn
upon the effectivity of the Local Government
Code.

XPNS: Those exemptions or incentives

conferred to:
1. Local water districts
2. Cooperatives duly registered under R.A.
6938;
3. Non-stock and non-profit hospitals and
educational institutions. (Sec. 193, LGC)

Note: However, withdrawal of tax exemption is not

to be construed as prohibiting future grants of tax
exemptions. The grant of taxing powers to LGU s
under the LGC does not affect the power of Congress
to grant exemptions to certain persons, pursuant to
a declared national policy.

Necessity of Reenactment: The person claiming the

exemption has the burden of proving its claim by
clear grant of exemption after the enactment of the
LGC (NAPOCOR v. City of Cabanatuan, G.R. No.
149110, April 9, 2003)

The rule that special law must prevail over the

provisions of a later general law does not apply as
the legislative purpose to withdraw tax privileges
enjoyed under existing laws or charters is apparent
from the express provisions of the LGC (City of San
Pablo, Laguna v. Reyes, G.R. No. 127780, March 25,
1999)

Q: What is the rationale for the withdrawal of

tax exemptions?

A: The intention of the law in withdrawing the tax

exemptions is to broaden the tax base of local
government units to assure them of substantial
sources of revenue. (Philippine Rural Electric

Cooperatives Association v. The Secretary of DILG,

G.R. No. 143076. June 10, 2003)

Authority to Adjust Local Tax Rates

Q: Does the LGU have power to adjust local tax

rates?

A: Yes, provided that the adjustment of the tax

rates as prescribed herein should not be oftener
than once every five (5) years, and in no case shall
such adjustment exceed ten percent (10%) of the
rates fixed under the LGC. (Sec. 191, LGC)

Residual taxing power of local governments

Q: What is the so-called

of the LGU ?

Residual Taxing Power

A: LGUs may exercise the power to levy taxes,

fees or charges on any base or subject NOT
otherwise specifically enumerated herein or
taxed under the
1. Local Government Code;
2. National Internal Revenue Code; or
3. Other applicable laws. (Sec. 186, LGC)

Q: What are the conditions in the exercise of the

residual power of taxation?

A:
1. That the taxes, fees, or charges shall not
be unjust, excessive, oppressive,
confiscatory or contrary to declared
national policy; and
2. That the ordinance levying such taxes,

fees or charges shall not be enacted

without any prior hearing conducted for
the purpose. (Ibid.)

Q: What are the limitations of the residual

power?

A:
1. Constitutional limitations on taxing
power
2. Common limitations on the taxing
power of local government units as
prescribed in Section 133 of the Local
Government Code
3. Fundamental principles governing the
exercise of the taxing power by local
governments as prescribed under
Section 130 of the LGC, particularly the
requirement that they must not be
unjust, excessive, oppressive,
confiscatory, or contrary to declared
national policy (Sec. 186, LGC)
4. The requirement prescribed in Section
186 of the LGC, which directs that the
ordinance levying such residual taxes
shall not be enacted without any prior
public hearing conducted for the
purpose
5. Principle of Pre-emption

Note: See discussion under Common

Limitations of the Taxing Powers of LGUs.

Q: Can LGUs tax the National Government?

A:
GR: LGUs cannot impose taxes, fees or
charges of any kind on the National
Government, its agencies and
instrumentalities.

XPN: When specific provisions of the LGC

authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities (City

Government of San Pablo, Laguna v. Reyes,

G.R. No. 127708, Mar. 25, 1999)

Authority to Issue Local Tax Ordinances

Q: What are the kinds of Local Tax Ordinances?

A:
1. Those imposing a fee or tax specifically
authorized by the Local Government
Code for the local government units to
impose.
2. Those imposing a fee or tax not
specifically enumerated under the LGC
or taxed under the provisions of the
NIRC or other applicable laws (Sec. 186,
LGC)

Q: How shall the sanggunian levy local taxes?

A: It shall be exercised through an appropriate

ordinance. However, the local chief executive
(except the punong barangay) possesses veto
powers as laid down in Sec. 55 of LGC.

LOCAL TAXING AUTHORITY

Power to Create Revenues Exercised thru LGUs

Q: What is the taxing power of the LGU?

A: Each local government unit has the power to:

1. Create its own sources of revenue; and

2. Levy taxes, fees, and charges subject to
the provisions herein, consistent with
the basic policy of local autonomy.(Sec.
129, LGC)

Note: Such taxes, fees, and charges shall accrue

exclusively to the local government units. (Ibid.)

Q: Who shall exercise local taxing authority?

A: The power to impose a tax, fee, or charge or to

generate revenue under the LGC shall be
exercised by the sanggunian of the local
government unit concerned through an
appropriate ordinance. (Sec. 132, LGC)

Q: What are the powers incidental to local

taxation?

A:
1. Power to prescribe penalties for tax
violations and limitations thereon.
2. Power to adjust local tax rate LGUs are
authorized to adjust the tax rates as
prescribed under the LGC not oftener
than once every 5 years, and in no case
shall such adjustment exceed 10% of
the rates fixed under the LGC. (Sec. 191,
LGC)
3. Power to grant local exemptions LGUs
may through ordinances duly approved,
grant tax exemptions, incentives or
reliefs under such terms and conditions,
as they may deem necessary. (Sec. 192,
LGC)

Procedure for Approval and Effectivity of

Tax Ordinances

Q: What are the requisites of a valid tax

ordinance?

A:
1. The procedure applicable to local
government ordinances in general
should be observed. (Sec. 187, LGC) The
following procedural details must be
complied with:
a. Necessity of quorum
b. Submission for approval by the
local chief executive
c. The matter of veto and overriding
the same
d. Publication and effectivity (Secs.
54, 55, and 59, LGC)
2. Public hearings are required before any
local tax ordinance is enacted (Sec. 187,
LGC)
3. Within 10 days after their approval,
publication in full for 3 consecutive days
in a newspaper of general circulation. In
the absence of such newspaper in the
province, city or municipality, then the
ordinance may be posted in at least two
conspicuous and publicly accessible
places (Sec. 188 & 189, LGC)

Note: The requirement of publication in full for 3

consecutive days is mandatory for a tax ordinance to
be valid. The tax ordinance will be null and void if it
fails to comply with such publication requirement.
(Coca-Cola v. City of Manila, G.R. No. 161893 June
27, 2006)

Scope of Taxing Power

Q: What is the scope of the taxing power of

LGUs?

A:
1. Each local government unit shall

exercise its power to create its own

sources of revenue and to levy taxes,
fees, and charges, consistent with the
basic policy of local autonomy. Such
taxes, fees, and charges shall exclusively
accrue to it. (Sec. 129, LGC)
2. All local government units are granted
general powers to levy taxes, fees or
charges on any base or subject not
otherwise specifically enumerated
herein or taxed under the provisions of
the NIRC, as amended, or other
applicable laws. The levy must not be
unjust, excessive, oppressive,
confiscatory or contrary to a declared
national economic policy. (Sec. 186,
LGC)
3. No such taxes, fees or charges shall be
imposed without a public hearing
having been held prior to the
enactment of the ordinance. (Sec. 187,
LGC)
4. Copies of the provincial, city, and
municipal tax ordinances or revenue
measures shall be published in full for
three consecutive days in a newspaper
of local circulation or posted in at least
two conspicuous and publicly accessible
places. (Sec. 188, LGC)

Specific Taxing Power of Local Government Unit

(LGUs) Taxing power of provinces

Q: What are the taxes, fees and charges which a

province or a city may levy?

A:
1. Tax on transfer of real property
ownership (Sec. 135, LGC)
2. Tax on business of printing and
publication (Sec. 136, LGC)
3. Franchise Tax (Sec. 137, LGC)
4. Tax on sand, gravel and other quarry
resources (Sec. 138, LGC)
5. Professional tax (Sec. 139, LGC)
6. Amusement tax (Sec. 140, LGC)
7. Annual fixed tax for every delivery truck
or van of manufacturer or producers,
wholesalers of, dealers, or retailer in
certain products (Sec. 141, LGC)

SUMMARY RULES ON THE TAXING POWER OF A PROVINCE

TRANSACTION SUBJECT TO TAX

TAX BASE
TAX RATE
EXCEPTION
Tax on transfer of real property ownership
Sale , donation, barter, or on any
other mode of transferring
ownership or title of real
property
Whichever is higher between:
1. total consideration involved in
the acquisition of the property;
or
2. the fair market value in case
the monetary consideration
involved in the transfer is not
substantial
Not more than fifty
percent (50%) of
the one percent
(1%)
Transfer under the
Comprehensive
Agrarian Reform
Program
Person Liable to Pay: Seller, donor, transferor, executor, or administrator
Time of Payment: within 60 days from the date of the execution of the deed or fr
om the date of the decedent s death
Tax on the business of printing and publication
Business of printing and
publication of books, cards,
poster, leaflets, handbills,
certificates, receipts, pamphlets,
and others of similar nature
Gross annual receipts for the
preceding calendar year.
Not exceeding fifty
percent (50%) of
one percent (1%)

School texts or
references,
prescribed by the
DepEd shall be
exempt from tax.
Capital Investment
In the case of a
newly started
business, the tax
shall not exceed
one-twentieth
(1/20) of one
percent (1%)
Franchise tax
Businesses enjoying a franchise
Gross annual receipts for the
preceding calendar year based on
the incoming receipt, or realized,
within its territorial jurisdiction.
Not exceeding fifty
percent (50%) of
one percent (1%)

Capital investment.

In the case of a
newly started
business, the tax
shall not exceed
one-twentieth
(1/20) of one
percent (1%)
Tax on sand, gravel and other quarry resources
Sand, gravel and other resources
extracted from public lands or
from the beds of seas, lakes,
rivers, streams, creeks, and other
public waters within its territorial
jurisdiction
Fair market value in the locality per
cubic meter of ordinary stones,
sand, gravel, earth, and other
quarry resources
Not more than ten
percent (10%)

Who issues permit: issued exclusively by the provincial governor pursuant to the
ordinance of the Sangguniang
Panlalawigan

Distribution of Tax Proceeds:

a. Province

30%

b. Component city or municipality

30%

c. Barangay where resources were extracted 40%

Note: the authority to impose taxes and fees for extraction of sand and gravel b
elongs to the province, and not to the
municipality where they are found. (Municipality of San Fernando La Union vs. St
a. Romana, G.R. No. L-30159, March 31,
1998)

Regalian Doctrine is not applicable. Province may not invoke the doctrine to ext
end the coverage of its ordinance to
quarry resources extracted from private lands.
Rationale: tax statutes are construed strictissimi juris against the government.
(Province of Bulacan vs. CA, G.R. No.
126232)

Professional tax
Exercise or practice of profession
requiring government licensure
examination
At such amount and reasonable
classification as the sanggunian
panlalawigan may impose
Not to exceed P300
Professionals
exclusively employed
in the government
shall be exempt from
the payment of this
tax
Date of Payment: payable annually on or before January 31 or before beginning th
e practice of the profession

Place of Payment: Province where he practices his profession or where the princi
pal office is located

Note: TAX TO BE PAID ONLY ONCE. Person who has paid the corresponding profession
al tax shall be entitled to practice
his profession in any part of the Philippines without being subjected to any oth
er national or local tax, license, or fee for
the practice of such profession
Amusement tax
Ownership, lease or operation of
theaters, cinemas, concert halls,
circuses, boxing stadium and
other places of amusement
Gross receipts from admission
fees.

In case of theaters or cinemas, the

tax shall first be deducted and
withheld by their proprietors,
lessees, or operators and paid to
the provincial treasurer before the
gross receipts are divided between
said proprietors, lessees, or
operators and the distributors of
the cinematographic films.
Not more than 10%
of gross receipts

from admission
fees (as amended
by R.A. No. 9640,
May 21, 2009)
GR: The holding of
operas, concerts,
dramas, recitals,
painting and art
exhibitions, flower
shows, musical
programs, literary
and oratorical
presentation shall be
exempt from the
payment of
amusement tax.

XPN:
Holding of pop, rock,
or similar concerts
shall be subject to
amusement tax.
Note: The Supreme Court held that it is the intent of the Legislature not to imp
ose VAT on persons already covered by
the amusement tax. Thus, the gross receipts derived by respondents from admissio
n tickets in showing motion pictures,
films or movies are subjected to the Amusement Tax and not to value-added tax un
der the NIRC. (CIR v SM Prime
Holdings Inc., G.R. No. 183505, Feb 26, 2010)

Distribution of Proceeds: Tax shall be shared equally by the province and munici
pality where such amusement places are
located.
Annual fixed tax for every delivery truck or van of manufacturer or producers, w
holesalers of, dealers, or retailer in
certain products
Use by manufacturers,
producers, wholesalers, dealers
or retailers of truck, van or any
vehicle in the delivery or
distribution of distilled spirits,
fermented liquors, soft drinks,
cigars and cigarettes, and other
products as may be determined
by the sangguniang
panlalawigan, to sales outlets, or
consumers, whether directly or
indirectly.
Every truck, van or vehicle

Not exceeding P500

Exempt from tax on
peddlers imposed by
municipalities

Q: To whom is the tax on transfer of real

property ownership due?
A: It is due from the seller of the property.
However, if the buyer is a foreign government, no
such tax is due.

Q: What is meant by franchise in the phrase

tax on business enjoying a franchise under Sec.
137 of the Local Government Code?

A: The Congress defined it in the sense of a

secondary or special franchise. It is not levied on
the corporation simply for existing as a
corporation, upon its property or income, but on
its exercise of the rights or privileges granted to it
by the government.

Q: Who are the professionals subject to

professional tax?

A: They are those who have passed the bar

examinations, or any board or examinations
conducted by the Professional Regulation
Commission (PRC).

e.g. A lawyer who is also a Certified Public

Accountant (CPA) must pay the professional tax
imposed on lawyer and that fixed for CPAs, if he is
to practice both professions.

Note: Municipalities cannot impose professional tax

since such power is reserved only to provinces and
cities.

Q: Mr. Fermin, a resident of Quezon City, is a

Certified Public Accountant-Lawyer engaged in
the practice of his two professions. He has his
main office in Makati City and maintains a
branch office in Pasig City. Mr. Fermin pays his
professional tax as a CPA in Makati City and his
professional tax as a lawyer in Pasig City.
1. May Makati City, where he has his main
office, require him to pay his professional

tax as a lawyer? Explain.

2. May Quezon City, where he has his

residence and where he also practices his
two professions, go after him for the
payment of his professional tax as a CPA
and a lawyer? Explain.

A:
1. No. Makati City where Mr. Fermin has
his main office may not require him to
pay his professional tax as a lawyer. Mr.
Fermin has the option of paying his
professional tax as a lawyer in Pasig City
where he practices law or in Makati City
where he maintains his principal office.
(Sec. 139[b], LGC)

2. No, the situs of the professional tax is

the city where the professional
practices his profession or where he
maintains his principal office in case he
practices his profession in several
places. The local government of Quezon
City has no right to collect the
professional tax from Mr. Fermin as the
place of residence of the taxpayer is not
the proper situs in the collection of the
professional tax. (2005 Bar Question)

Q: Has the province authority to impose taxes on

sand, gravel and other quarry resources
extracted on private lands?

A: No, A province is not expressly authorized to

do so. Such tax is a tax upon the performance,
carrying on, or exercise of an activity, hence an
excise tax upon an activity already being taxed
under the NIRC. (Province of Bulacan, et. al., v. CA
G.R.No. 126232, Nov. 27, 1998)

Q: What is amusement and amusement places

as defined under the LGC?

A:
1. Amusement is a pleasurable diversion
and entertainment. It is synonymous to
relaxation, avocation, pastime, or fun;
2. Amusement places include theaters,
cinemas, concert halls, circuses and
other places of amusement where one
seeks admission to entertain oneself by
seeing or viewing the show or
performances. Sec. 131[b] and [c], LGC)

Q: What are the amusement places upon which

provinces or cities cannot impose amusement
taxes?

A:
1.
2.
3.
4.
5.
6.
7.

Cockpits
Cabarets
Night or day clubs
Boxing exhibitions
Professional basketball games
Jai-Alai
Racetracks

Note: There can be no imposition of amusement

taxes on the above amusement places since the
NIRC already imposes amusement taxes on them
under Section 125 thereof.

Q: May LGUs collect amusement taxes on

admission tickets to the Philippine Basketball
Association (PBA) games?

A: No. Professional basketball games are within

the ambit of national taxation as it is presently
being taxed under the provisions of the NIRC.
Furthermore, the income from cession of
streamers and advertising spaces is subject to
amusement taxes under the NIRC because the
definition under the Tax Code is broad enough to
include the cession of streamers and advertising
spaces as the same includes all the receipts of the
proprietor, lessee or operator of the amusement
place. (Philippine Basketball Association v. CA,
G.R. No. 119122, Aug. 8, 2000)

Taxing Powers of Cities

Q: What is the scope of the taxing power of a

city?

A: The city, may levy the taxes, fees, and charges

which the province or municipality may impose,
except as otherwise provided in the LGC. Those
levied and collected by highly urbanized and
independent component cities shall accrue to
them and distributed in accordance with the
provisions of LGC. (Sec. 151, LGC)

Note: The rates of taxes that the city may levy may
exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%)
except the rates of professional and amusement
taxes. (Ibid.)

Cities have the broadest taxing powers, embracing

both specific and general powers as provinces and
municipalities may impose.

Under the LGC, there are three types of cities,

Component Cities, Independent Component Cities
and Highly Urbanized Cities. ICCs and HUCs are

independent of the province (Sec. 451-452, LGC).

This means that taxes, fees and charges levied and
collected by ICCs and HUCs accrue solely to them.
(Sec. 151, LGC)

Taxing Powers of Municipalities

Q: What is the scope of the taxing power of a

municipality?

A: Municipalities may levy taxes, fees, and

charges not otherwise levied by provinces, except
as otherwise provided in the LGC. (Sec. 142, LGC)

Q: What are the taxes that a municipality may

impose under the LGC?

A:
1. Tax on business (Sec. 143, LGC)
2. Fees and charges on business and
occupation (Sec. 147, LGC)
3. Fees for sealing and licensing of weights
and measures (Sec. 148, LGC)
4. Fishery rentals, fees and charges (Sec.
149, LGC)

Q: What are the businesses under Section 143 of

the Local Government Code upon which
municipalities may impose business taxes?

A: ManWhoRE-COP-B
1. On Manufacturers, assemblers,
repackers, processors, brewers,
distillers, rectifiers, and compounders of
liquors, distilled spirits, and wines or
manufacturers of any article of
commerce of whatever kind or nature;
2. On Wholesalers, distributors, or dealers
in any article of commerce of whatever
kind or nature;
3. On exporters, and on manufacturers,

millers, producers, wholesalers,

distributors, dealers or retailers of
Essential commodities;
4. On Retailers;
5. On Contractors;
6. Banks and other financial institutions;
7. Peddlers;
8. Other business not specified which the
sanggunian concerned my deem proper
to tax.

Q: What is Wholesale?

A: A sale where the purchaser buys or imports the

commodities for resale to persons other than the
end user regardless of the quantity of the
transaction.

Q: Who are Dealers?

A: One whose business is to buy and sell

merchandise, goods, and chattels as a merchant.
He stands immediately between the producer or
manufacturer and the consumer and depends for
his profit not upon the labor he bestows upon his
commodities but upon the skill and foresight with

Q: What is Retail?

A: A sale where the purchaser buys the

commodity for his own consumption, irrespective
of the quantity of the commodity sold

Q: Who is a Contractor?

A: Includes persons, natural or juridical, not

subject to professional tax under Section 139 of
the Code, whose activity consists essentially of
the sale of all kinds of services for a fee,
regardless of whether or not the performance of
the service calls for the exercise of the use of the
physical or mental faculties of such contractor or
his employees.

Q: What are the conditions to which other

businesses not specified may the sanggunian
concerned deem proper to tax?
A:
1. Business not subject to Vat or
percentage tax under the NIRC; and
2. Tax rate not to exceed 2% of the gross
sales/receipts of the preceding calendar
year.

Note: When a municipality or city has already

imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other
article of commerce pursuant to Section 143(a) of
the LGC, said municipality or city may no longer
subject the same manufacturers, etc. to a
business tax under section 143(h) of the same
Code. Section 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs.
(Coca-Cola Bottlers Phils. Inc., G.R. No. 181845,
August 4, 2009)

Q: Who is a peddler?

A: Peddler means any person who, either for

himself or on commission, travels from place to
place and sells his goods or offers to sell and
deliver the same. (Sec. 131[t], LGC).

Q: What are considered Essential Commodities?

A:
1. Rice and corn
2. Wheat or cassava flour, meat, dairy
products, locally manufactured,
processed or preserved food, sugar, salt
and other agricultural, marine and fresh
water products, whether in their
original state or not
3. Cooking oil and cooking gas
4. Laundry soap, detergents, and medicine
5. Agricultural implements, equipment
and post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides, and
other farm inputs
6. Poultry, feeds and other animal feeds
7. School supplies
8. Cement

Tax on Various Types of Businesses

PERSON/ENTITIES
SUBJECT TO TAX
TAX BASE
TAX RATE
EXCEPTION
Tax on Business
Manufacturers, assemblers,
repackers, processors, brewers,
distillers, rectifiers, and
compounders of liquors, distilled
spirits and wines or manufacturers
of any article of commerce of
whatever kind or nature. (Sec.
143[a])
Based on the taxpayer s gross
sales or receipts for the preceding
calendar year.
GRADUATED ANNUAL FIXED
TAX

Gross sales or receipts amount to

P6,500,000 or more for the
preceding calendar year
Ceases to be a fixed tax,
instead a PERCENTAGE TAX
of 37.5% of 1% is imposed.
Wholesalers, distributors or dealers
in any article of commerce of
whatever kind or nature. (Sec.
143[b], LGC)
Based on the gross sales or
receipts for the preceding
calendar year
GRADUATED ANNUAL FIXED
TAX

Gross sales or receipts amounting

to P2,000,000 or more
Tax becomes a PERCENTAGE
TAX at the rate of 50% of 1%
Exporters and manufacturers,
millers, producers wholesalers,
distributors, dealers or retailers of
the following essential
commodities. (Sec. 143[c], LGC)

Not exceeding one-half (1/2)

of the rates prescribed under
subsections (a), (b) and (d) of
this Section

Retailers (Sec. 143[d], LGC)

Gross sales or receipts for the
preceding calendar year P400,000
or less
ANNUAL PERCENTAGE TAX of
2%
a. Gross sales or
receipts in cities
P50,000 or less
b. Gross sales or
receipts in
municipalities
P30,000 or less

Note:
taxed by barangays
Sales or receipts exceeding
P400,000
ANNUAL PERCENTAGE TAX of
1%
Contractors and other independent
contractors (Sec. 143[e], LGC)
Gross receipts for the preceding
calendar year
GRADUATED ANNUAL FIXED
TAX

Gross receipts amounting to

P2,000,000 or more
PERCENTAGE TAX of
50% of 1%
Banks and other financial
institutions (Sec. 143[f], LGC)
Gross receipts of the preceding
calendar year derived from
interests, commission and
discounts from lending activities,
income from financial leasing,
dividends, rentals on property
and profit from exchange or sale
of property insurance premium
50% of 1%

Peddlers engaged in the sale of any

merchandise or article of
commerce. (Sec. 143[g], LGC)
Per peddler
Not exceeding P50

On any business not otherwise

specified above (Sec. 143[h], LGC)

Graduated schedule imposed

by the Sanggunian
concerned, but in no case to
exceed the rates prescribed
in Sec. 143, LGC.

Municipal Non-Revenue Fees & Charges

Municipalities may impose & collect reasonable fees & charges on business & occu
pation and, except in case of professional tax, (w/c
only provinces & cities may levy) on the practice of any profession or calling c
ommensurate w/ the cost of regulation, inspection &
licensing before any person may engage in such business/occupation/practice of s
uch profession or calling. (Sec. 147, LGC)

Ceiling on business tax imposable on

municipalities within Metro Manila

Q: What are the rates of business within the

Metropolitan Manila Area?

A: The municipalities in Metro Manila may levy

taxes at rates which shall not exceed by 50% the
maximum rates prescribed in Section 143, LGC.
(Sec. 144, LGC)

Tax on Retirement of Business

Q: When is a business considered officially

retired?

A:
1. A business subject to tax shall, upon
termination thereof, submit a sworn
statement of its gross sales or receipts
for the current year.
2. If the tax paid during the year be less
than the tax due on said gross sales of
receipts of the current year, the
difference shall be paid before the
business is considered officially
retired.(Sec. 145, LGC)

Rules on Payment of Business Tax

Q: How is Payment of Business Taxes

conducted?

A:

1. Taxes shall be payable for every

separate or distinct establishment or
place where business subject to the tax
is conducted and one line of business
does not become exempt by being
conducted with some other business for
which such tax has been paid.
2. The tax on a business must be paid by
the person conducting the same.
3. In cases where a person conducts or
operates 2 or more of the businesses
mentioned in Section 143 of LGC which
are subject to:
a. Same rate of tax
the tax shall be
computed on the combined total
gross sales or receipts of the said 2
or more related business.
b. Different rates of tax
the gross
sales or receipts of each business
shall be separately reported for the
purpose of computing the tax due
from each business.

Fees and Charges for Regulation and Licensing

Q: What are the fees and charges that a

municipality may impose?

A: The municipality may impose and collect such

reasonable fees and charges on business and
occupation except professional taxes reserved for
provinces (Sec. 147, LGC)
1. Fees for Sealing and Licensing of
Weights and Measures (Sec. 148, LGC)
2. Fishery Rentals, Fees and Charges,
including the authority to grant fishery
privileges within municipal waters, as
well as issue licenses for the operation
of fishing vessels of three tons or less.
3. The sanggunian may penalize the use of
explosives, noxious or poisonous
substances, electricity, muro ami, and
other deleterious methods of fishing
and prescribe a criminal penalty
therefore. (Sec. 149, LGC)

Note: Principal is the head or main office of the

business appearing in the pertinent documents
submitted to the SEC, or DTI, or other appropriate
agencies, as the case may be.

Situs of Tax Collected

Q: What is the situs of business tax?

A:
SITUATION
RECOGNITION OF SALE
PAYMENT OF TAX
With branch or sales office or
warehouse
All sales made in the locality
where the branch or office or
warehouse is located
The tax shall be payable to the city or
municipality where the same is located.
Where there is no branch or sales
office or warehouse
The municipality where the sale
or transaction is made.
The sale shall be recorded in
the principal office along with
the sales made by said principal
office
The tax shall accrue to the city or
municipality where said principal office is
located.
Branch office
a fixed place in a locality which conducts operations of the busin
ess as an extension of the principal office.

Principal office head or main office of the business appearing in pertinent docu
ments submitted to the SEC and
specifically mentioned in the Articles of Incorporation.
Where there is a factory, project
office, plant or plantation in pursuit of
business
All sales shall be recorded in the
principal office.
Of all sales recorded in the principal office:

1. 30% taxable to the city or municipality

where the principal office is located.
2. 70% taxable to the city or municipality
where the factory, plant, etc. is located.

The 70% (above) shall be divided as follows:

1. 60% to the city or municipality where the
factory is.
2. 40% to the city or municipality where the
plantation is located.

The 70% shall be prorated among the

localities where such factories, project
offices, plants and plantations are located
based on their respective volumes of
production.
If plantation is at a place other than
where the factory is located
All sales shall be recorded in the
principal office.
If manufacturer, contractor, etc. has
two or more factories, project offices,
plants or plantations located in
different localities.
All sales shall be recorded in the
principal office.

Note: in case of manufacturers or producers which engage the services of an inde

pendent contractor to produce or
manufacture some of their products, these rules shall apply except that the fact
ory or plant and warehouse of the
contractor utilized for the production and storage of the manufacturers products
shall be considered as the factory
or plant and warehouse of the manufacturer. (IRR)

The city or municipality where the port of loading is located shall not levy and
collect reasonable fees unless the
exporter maintains in said city or municipality its principal office, a branch,
sales office, or warehouse, factory, plant

or plantation in which case, the rule on the matter shall apply accordingly. (IR
R)

Situs according to Jurisprudence:

Excise tax
Tax is imposed on the performance of an act or occupation, enjoyment
of a privilege.
The power to levy such tax depends on the place in which the act is performed o
r the occupation is
engaged in; not upon the location of the office. (Allied Thread Co., Inc. v. Cit
y Mayor of Manila, L-40296, November
21, 1984)

Sales Tax
With respect to sale, it is the place of the consummation of the sale,
associated with the delivery of the
things which are the subject matter of the contract that determines the situs of
the contract for purposes of
taxation, and not merely the place of the perfection of the contract. (Shell Co.
, Inc. v. Municipality of Sipocot,
Camarines Sur, 105 Phil 1263)

Taxing Powers of Barangays

Q: What is the scope of the taxing power of a barangay?

A:
SOURCES OF REVENUE
TAX BASE
TAX RATE
FEES AND
CHARGES
BARANGAY TAXES
On stores or
retailers with fixed business
establishments
Gross sales receipts for
preceding calendar year of
P50,000 or less (for barangay
in the cities); and

P30,000 or less (for barangay

and municipalities
Not exceeding 1% of
such gross sales or
receipts.

SERVICE FEES OR CHARGES

Services rendered in
connection with the regulation
or the use of barangay-owned
properties; or
Service facilities such as palay,
copra, or tobacco dryers
Reasonable Fees or
charges

BARANGAY CLEARNCE

Reasonable fee
as the
Sanggunian
Barangay may
impose
OTHER FEES AND CHARGES
a. Commercial breeding of
fighting cocks, cockfights and
cockpits
b. Places of recreation which
charge admission fees
c. Billboards, signboards, neon
signs and outdoor
advertisements

Reasonable fees
and charges as
the barangay
may levy.

Note: The enumeration shall accrue EXCLUSIVELY to them.

Common Revenue Raising Powers

Service Fees and Charges, Public Utility Charges,

Toll Fees or Charges

Q: What are the common revenue raising

powers of LGUs?

A:
1. Fees, service or user charges
LGUs
may impose and collect such reasonable
fees and charges for services rendered.
(Sec. 153, LGC)
2. Public utility charges
may fix the rates
for the operation of public utilities
owned, operated and maintained by
them within their jurisdiction. (Sec. 154,
LGC)
3. Toll fees or charges The sanggunian

concerned may prescribe the terms and

conditions and fix the rates for the
imposition of toll fees or charges for the
use of any public road, pier, or wharf,
waterway, bridge, ferry or
telecommunication system funded and
constructed by the local government
unit concerned. (Sec. 155, LGC)

Q: Who are exempted from payment of tolls,

fees or other charges?

A: HOP
1. Officers and enlisted men of the Armed
Forces of the Philippines and members
of PNP on mission
2. Post office personnel delivering mail
3. Physically Handicapped and disabled
citizens, 65 years or older. (Ibid.)

Q: May LGUs discontinue the collection of tolls?

A: The sanggunian concerned may discontinue

the collection of the tolls when public safety and
welfare so requires. Thereafter, the said facility

shall be free and open for public use. (Sec. 155,

LGC)

Community Tax

Q: What is the nature of community tax?

A: The community is a poll or capitation tax

imposed upon residents of a city or municipality.
It replaced the former residence tax.

Q: Who levies community tax?

A: It may be levied by a city or municipality but

not a province.

Q: Who are liable to pay community tax?

A:
1. Individuals Every inhabitant of the
Philippines eighteen (18) years of age or
over:
a. who has been regularly employed
on a wage or salary basis for at
least thirty (30) consecutive
working days during any calendar
year; or
b. who is engaged in business or
occupation;
c. or who owns real property with an
aggregate assessed value of
P1,000.00 or more; or
d. who is required by law to file an
income tax return. (Sec. 157, LGC)

2. Juridical Persons Every corporation no

matter how created or organized,
whether domestic or resident foreign,
engaged in or doing business in the

Philippines. (Sec. 158, LGC)

Q: How much are they liable to pay?

A:
1. Individuals
a. Basic: Five pesos (P5.00)
b. Additional: Additional tax of One
peso (P1.00) for every One
thousand pesos (P1,000.00) of
income regardless of whether from
business, exercise of profession or
from property which in no case
shall exceed Five thousand pesos
(P5,000.00).

Note: In case of husband and wife,

the additional tax shall be based on
the total property, gross receipts or
earnings owned or derived by them.

2. Juridical persons
additional tax, which,
in no case, shall exceed Ten thousand
pesos (P10,000.00) in accordance with
the following schedule:
a. For every Five thousand pesos
(P5,000.00) worth of real property
in the Philippines owned by it
during the preceding year based
on the valuation used for the
payment of real property tax under
existing laws, found in the
assessment rolls of the city or
municipality where the real
property is situated - Two pesos
(P2.00); and
b. For every Five thousand pesos
(P5,000.00) of gross receipts or
earnings derived by it from its
business in the Philippines during
the preceding year - Two pesos
(P2.00). (Sec. 157 & 158, LGC)

Q: Where is community tax paid?

A: Residence of the individual, or in the place

where the principal office of the juridical entity is
located. (Sec. 160, LGC)

Q: When is the payment of community tax

required?

A: Accrues on the 1st day of January of each year

which shall be paid not later than the last day of
February of each year. (Sec. 161, LGC)

Q: What is the penalty for delinquency?

A: An interest of 24% per annum from the due

date until it is paid shall be added to the amount
due (Sec. 161, LGC)

Q: Who are exempted from paying community

tax?

A:
1. Diplomatic and consular representatives
2. Transient visitors when their stay in the
Philippines does not exceed three (3)
months. (Sec. 159, LGC)

Q: What is a Community Tax Certificate?

A: It is issued to every person or corporation upon

payment of the community tax. It may also be
issued to any person or corporation NOT subject
to the community tax upon payment of P1.00
(Sec. 162, LGC)

The city or municipal treasurer deputizes the

barangay treasurer to collect the community tax
in their respective jurisdictions and shall accrue
entirely to the general fund of the city or
municipality concerned.

Conditions: bonded in accordance with law (Sec.

164, LGC)

Proceeds of the community tax collected through

the barangay treasurers shall be apportioned as
follows:
1. 50% accrues to the general fund of the
city or municipality concerned; and
2. 50% accrues to the barangay where the
tax is collected

Q: When is the presentation of community tax

certificate required?

A:
1. Acknowledgment of any document
before a notary public;
2. Taking an oath of office upon election
or appointment to any position in the
government service;
3. Receiving any license, certificate. or
permit from any public authority;
4. Paying any tax or fee;
5. Receiving any money from any public
fund;
6. Transacting other official business; or
7. Receiving any salary or wage from any
person or corporation. (Sec. 163, LGC)

COMMON LIMITATIONS ON THE

TAXING POWERS OF LGUS

Q: Give the common limitations on the taxing

powers of the LGUs.

A: The exercise of the taxing powers of provinces,

cities, municipalities, and barangays shall not
extend to the levy of the following: IDE-C3AP3MENT
1. Income tax, except when levied on
banks and other financial institutions;
2. Documentary stamp tax;
3. Taxes on estates, inheritance, gifts,
legacies and other acquisitions mortis
causa, except as otherwise provided
under the LGC; exception: tax on
transfer of real property (Sec. 135, LGC)
4. Customs duties, registration fees of
vessel and wharfage on wharves,
tonnage dues, and all other kinds of
customs fees, charges and dues except
wharfage on wharves constructed and
maintained by the local government
unit concerned;
5. Taxes, fees, and charges and other
impositions upon goods carried into or
out of, or passing through, the
territorial jurisdictions of local
government units in the guise of
charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees, or
charges in any form whatsoever upon
such goods or merchandise;
6. Taxes, fees or charges on agricultural
and aquatic products when sold by
marginal farmers or fishermen;
7. Taxes on business enterprises certified
to by the Board of Investments as
pioneer or non-pioneer for a period of
six (6) and four (4) years, respectively
from the date of registration;

Note: However, the grant of the Income

Tax Holiday for registered enterprises
under EO 226 is subject to the following
rules:
a. For six (6) years from COMMERCIAL
OPERATION for pioneer firms and for
four (4) years for non-pioneer firms
fully exempt; and
b. For a period of three (3) years from
COMMERCIAL OPERATION,
registered expanding firms shall be
entitled to exemption from income
tax levied by the National

Government proportionate to their

expansion under such terms and
conditions as the Board may
determine. (EO 226, Title III, Article
39)
8. Excise taxes on articles enumerated
under the NIRC, as amended, and taxes,
fees or charges on petroleum products;

Note: LGUs may impose tax on a

petroleum business. A tax on business is
distinct from a tax on the article itself
(Phil. Petroleum Corporation vs
Municipality of Pililia Rizal, G.R. No.
90776, June 3, 1991)

9. Percentage or value-added tax (VAT) on

sales, barters or exchanges or similar
transactions on goods or services
except as otherwise provided herein;
10. Taxes on the gross receipts of
transportation contractors and persons
engaged in the transportation of
passengers or freight by hire and

common carriers by air, land or water,

except as provided in this Code;
11. Taxes on premiums paid by way or
reinsurance or retrocession;
12. Taxes, fees or charges for the
registration of motor vehicles and for
the issuance of all kinds of licenses or
permits for the driving thereof, except
tricycles;
13. Taxes, fees, or other charges on
Philippine products actually exported,
except as otherwise provided in the
LGC;(i.e. Sec. 143(c), LGC- municipalities
may impose taxes on exporters)
14. Taxes, fees, or charges, on Countryside
and Barangay Business Enterprises and
cooperatives duly registered under R.A.
No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No.
6938) otherwise known as the
"Cooperative Code of the Philippines"
respectively; and
15. Taxes, fees or charges of any kind on
the National Government, its agencies
and instrumentalities, and local
government units. (Sec. 133, LGC)

Note: An examination of the above enumeration

reveals that those taxes, charges and fees already
imposed and collected by the National Government
such as income taxes, estate taxes, donor s taxes,
documentary stamps taxes. Simply stated, the LGUs
cannot exercise taxing powers reserved to the
National Government. Thus, it is also called the
reservation rule or the exclusionary rule

Q: What is the Principle of Pre-emption or

Exclusionary Doctrine?

A: Where the National Government elects to tax a

particular area, it impliedly withholds form the
local government the delegated power to tax the
same field. This doctrine principally rests on the
intention of the congress.

Conversely, should the Congress allow municipal

corporations to cover fields of taxation it already
occupies then the doctrine of pre-emption will
NOT apply (Victorias Milling Co., Inc. vs.
Municipality of Victorias Negros Occidental, G.R.

No. L-21183, Sept. 27, 1968)

Q: When does the principle apply?

A: The principle applies to the following:

1. Taxes levied under the NIRC
2. Taxes imposed under the Tariff and
Customs Code
3. Taxes under special laws.

Q: How do you classify these common

limitations / excluded impositions?

A:
1. Taxes which are levied under the NIRC
unless otherwise provided by the LGC Items 1,2,3,8,9 and 10.
2. Taxes, fees, and charges which are
imposed under the Tariffs and Customs
Code - Item 4
3. Taxes, fees and charges where the
imposition of which contravenes
existing governmental policies or which
are violative of the fundamental
principles of taxation - Items 5, 6, 7, 11,
13, 14 and 15
4. Taxes, fees and charges imposed under
special laws - Item 12

Q: Can LGUs levy income taxes?

A:
GR: The exercise of the taxing authority of
LGUs shall not extend to the levy of income tax.

XPN: However, income tax may be levied on

banks and other financial institutions. (Sec.
133(a), LGC)

Q: What is wharfage?

A: It is a fee assessed against the cargo of a vessel

engaged in foreign or domestic trade based on
quantity, weight, or measure received and/ or
discharged by the vessel.

Q: What is the Authorization Limitation?

A: With the exception of cities, each local

government unit could not exercise the taxing
powers granted to others. Hence, a province
could not exercise the powers granted to
municipality and vice-versa. However, a city could
exercise the taxing powers of both a province and
a municipality.

Collection of Business Tax

Q: Distinguish business tax from income tax.

A:
BUSINESS TAX
INCOME TAX
As to nature
Imposed in the exercise of
police power for
regulatory purposes and
A tax on all yearly profits
arising from property,
professions, trades or

paid for the privilege of

carrying on a business in
the year the tax was paid.
offices, or as a tax on a
person s income,
emoluments, profits and
the like.
As to date of payment
Paid at the beginning of
the year as a fee to allow
the business to operate
for the rest of the year.
Due on or before the 15th
day of the 4th month
following the close of the
taxpayer s taxable year.
As a prerequisite to the conduct of business
It is a prerequisite to the
conduct of business
Not a prerequisite

Q: What should be the basis of business tax gross receipts or gross revenue?

A: It must be based on gross receipts as the law is

clear. Gross receipts include money or its
equivalent actually or constructively received in
consideration of services rendered or articles,
sold, exchanged or leased, whether actual or
constructive. To tax on gross revenue rather than
gross receipts will amount to double taxation
inasmuch as the revenue or income for a taxable
year includes gross receipts already reported
during the previous year for which local business
taxes had already been paid. (Ericsson
Telecommunications, Inc. v. City of Pasig, etc., et.
al., G.R. No. 176667, Nov. 22, 2007)

Q: Are condominium corporations liable to pay

business taxes under the Local Government
Code?

A: As a rule, a city or municipality is authorized to

impose a tax on business, which is defined under
the LGC as trade or commercial activity regularly
engaged as a means of livelihood or with view of
profit. By its very nature, a condominium
corporation is not engaged in business, and any
profit it derives is merely incidental, hence it may
not be the subject of business taxes. (Yamane,
etc. v. BA Lepanto Condominium Corporation, G.R.
No.154993, Oct. 25, 2005)

Tax Period and Manner of Payment

Q: What is tax period for the collection of taxes?

A: It is based on calendar year, unless otherwise

provided (Sec. 165 LGC)

Q: What is the manner of payment of the taxes?

A: It may be paid in quarterly instalments. (Sec.

165, LGC)

Accrual of Tax

Q: When does business tax accrue?

A: It accrues on the 1st day of January of each

year.

XPN: New taxes, fees or charges, or changes in

the rates thereof which shall accrue on the 1st day
of the quarter next following the effectivity of the
ordinance imposing such new levies or rates. (Sec.
166, LGC)

Time of Payment

Q: When should the tax be paid?

A: Within 20 days of January or of each

subsequent quarter (i.e. Jan. 20,, April 20, July 20,
and Oct. 20). It may be extended by the
sanggunian for justifiable reasons, without
surcharges or penalties. Extension cannot exceed
6 months (Sec. 167, LGC)

Penalties on Unpaid Taxes, Fees or Charges

Q: What are the penalties for unpaid taxes, fees

or charges?

A:
1. Surcharge of 25% on taxes, fees or
charges not paid on time; and
2. Interest not exceeding 2% per month of
the unpaid taxes, fees or charges
including surcharges, until the amount
is fully paid. In no case shall the total
interest exceed 36 months. (Sec. 168,
LGC)

Authority of Treasurer in Collection and

Inspection of Books

Q: Who has the authority to collect such taxes,

fees and charges?

A: Provincial, city, municipal, or barangay

treasurer, or their duly authorized deputies. (Sec.

170, LGC)

Q: Who has the authority to inspect the books of

persons or association?

A: The local treasurer or his deputy duly

authorized in writing, may examine the books,
accounts and other pertinent records of any

person, or association to ascertain and collect the

correct amount of tax. Examination shall be made
during the regular business hours, only once for
every tax period, and shall be certified to by the
examining official. (Sec. 171, LGC)

Taxpayer s Remedies

Q: What are the remedies available to the

taxpayer under local government taxation?

A:
1. Protest assessment
2. Claim for refund or tax credit
3. Judicial action

A. Prior to assessment

1. Administrative appeal to the Secretary

of Justice
i. Administrative appeal to the
Secretary of Justice questioning
the constitutionality or legality
within 30 days from the effectivity
of the tax ordinance or revenue
measure;
ii. Secretary of Justice shall render a
decision within sixty (60) days from
date of receipt of the appeal
iii. Within thirty (30) days after receipt
of the decision or the lapse of sixty
day period without action from the
Secretary of Justice, aggrieved
party may file appropriate
proceedings with a court of
competent jurisdiction.

Note: such appeal shall not have the

effect of suspending the effectivity of
the ordinance and the accrual of the
payment of the tax, fee, or charge
levied therein (Sec. 187, LGC)

2. Action for declaratory relief

B. After an assessment
1. Protest of the assessment
i. When the correct tax, fee or
charge is not paid, the Local
Treasurer shall issue a notice of
assessment within the applicable
prescriptive period. (Sec. 184, LGC)
stating the nature of the levy, the
amount of deficiency, the
surcharges, interests and penalties.
ii. The taxpayer may file a written
protest of the assessment with the
local treasurer contesting the
assessment; otherwise the
assessment shall become final and
executory.
iii. The local treasurer shall decide the
protest within sixty (60) days from
the time of its filing. If the local
treasurer finds the assessment to
be wholly or partly correct, he shall

deny the protest wholly or partly

with notice to the taxpayer.
iv. The taxpayer shall have thirty (30)
days from the receipt of the denial
of the protest or from the lapse of
the sixty (60) day period prescribed
herein within which to appeal with
the court of competent jurisdiction
otherwise the assessment
becomes conclusive and
unappealable. (Sec. 195, LGC)
v. The competent court referred to is
the Regional Trial Court (RTC)
which acts in the exercise of its
original jurisdiction.

2. Action for refund

i. A written claim for refund or credit
is filed with the local treasurer.
ii. A claim or proceeding is then filed
with the court of competent
jurisdiction (depending upon the
jurisdictional amount) within two
(2) years from the date of the
payment of such tax, fee, or
charge, or from the date the
taxpayer is entitled to a refund or
credit. (Sec. 196, LGC)

Note: The filing of a written claim for refund

with the local treasurer is a condition
precedent for maintaining a court action.

C. Judicial Remedies
1. Court Action
i. Within 30 days after receipt of
decision or lapse of 60 days in case
of Secretary of Justice s inaction
(Sec. 187, LGC)
ii. Within 300 days from receipt when
protest of assessment is denied or
lapse of 60 days in case of local
treasurer s inaction (Sec. 195, LGC)
iii. If no action is taken by the
treasurer in refund cases and the
two year period is about to lapse
(Sec. 195, LGC)

iv. If remedies available does not

provide plain, speedy and
adequate remedy.
2. Action for declaratory relief

Periods of Assessment and Collection of

Local Taxes, Fees or Charges

Q: What is the period of assessment of local

taxes?

A:
GR: Local taxes, fees, or charges shall be
assessed within five (5) years from the date
they became due. No action for the collection
of such taxes, fees, or charges, whether
administrative or judicial, shall be instituted
after the expiration of such period.

XPN: In case of fraud or intent to evade the

payment of taxes, fees, or charges, the same
may be assessed within ten (10) years from
discovery of the fraud or intent to evade
payment. (Sec. 184 [a] and [b], LGC)

Q: What is the period of collection of local taxes?

A: Local taxes, fees, or charges may be collected

within five (5) years from the date of assessment
by administrative or judicial action. (Sec. 194(c),
LGC)

Q: When is the running of the prescriptive period

suspended?

A: The running of the periods of prescription

provided in the preceding paragraphs shall be
suspended for the time during which: Pre-Req-OC

1. The treasurer is legally Prevented from

making the assessment of collection;
2. The taxpayer Requests for a
reinvestigation and executes a waiver in
writing before expiration of the period
within which to assess or collect; and
3. The taxpayer is Out of the Country or
otherwise cannot be located. (Sec.
195[d], LGC)

Protest of Assessment

Q: Discuss the procedure for the protest of assessment?

A:
The Local Treasurer shall
decide the protest within 60
days from the time of its filing
Local Treasurer finds protest
wholly or partly meritorious
Local Treasurer issues a
notice cancelling wholly or
partially the assessment
Local Treasurer finds the
assessment wholly or partly
correct
Local Treasurer denies the
protest wholly or partly
with notice to the taxpayer
Taxpayer has 30 days from
receipt of the denial of the
protest or from lapse of the
60 day period prescribed to
appeal with a court of
competent jurisdiction
Taxpayer does not appeal
Assessment becomes
conclusive and unappealable
(Sec. 195, LGC)
Assessment is made by local treasurer
Assessment is final
and executory
Receipt by the Taxpayer
Taxpayer has 60 days to file a
written protest with treasurer

Note: The competent court referred to is the Regional Trial Court (RTC) which ac
ts in the exercise of its original
jurisdiction.

Claim for Refund of Tax Credit for Erroneously or

Illegally Collected Tax, Fee or Charge

Q: What are the grounds for the refund of local

government taxes, fees or charges?

A:
1. Erroneously collected
2. Illegally collected (Sec. 196, LGC.)

Q: What is the procedure for the refund of local

government taxes, fees or charges?

A:
1. A written claim for refund or credit is
filed with the local treasurer.
2. A claim or proceeding is then filed with
the court of competent jurisdiction
(depending upon the jurisdictional
amount) within two (2) years from the
date of the payment of such tax, fee, or
charge, or from the date the taxpayer is
entitled to a refund or credit. (Ibid.)

Q: What are the remedies available to the local

government units in collecting revenues?

A:
1. Local government lien
2. Civil remedies
a. Distraint of personal property
b. Levy of real property
c. Judicial action (Secs. 173 & 174,
LGC)

Local Government s Lien for

Delinquent Taxes, Fees or Charges

Q: What is the nature of the local government s

lien?

A: Local taxes, fees, charges and other revenues

constitute a lien, superior to all liens, charges or
encumbrances in favor of any person, enforceable
by appropriate administrative or judicial action,
not only upon any property or rights therein
which may be subject to the lien but also upon
property used in business, occupation, practice of
profession or calling, or exercise of privilege with
respect to which the lien is imposed. (Sec. 173,
LGC)

Q: How are they extinguished?

A: The lien may only be extinguished upon full

payment of the delinquent local taxes fees and
charges including related surcharges and interest.
(Ibid.)

Civil Remedies, in General

Administrative Action

SUMMARY FOR PROCEDURE FOR DISTRAINT

Failure of the person owing any local tax,
fee, or charge to pay the same at the time
required (Sec. 175[a], LGC)
Local treasurer or his deputy issues written notice
to the taxpayer concerned informing to seize or
confiscate any personal property belonging to
that person or any personal property subject to
the lien in sufficient quantity to satisfy the tax,
fee, or charge in question, together with any
increment thereto incident to delinquency and
the expenses of seizure (Sec. 175[a], LGC)
The local treasurer or his deputy shall issue a duly
authenticated certificate based upon the records
of his office showing the fact of delinquency and
the amounts of the tax, fee, or charge and
penalty due. Such certificate shall serve as
sufficient warrant for the distraint of personal
property aforementioned, subject to the
taxpayer s right to claim exemption under the
provisions of existing laws (Sec. 175[a], LGC)
The officer executing the distraint shall
make or cause to be made an account of
the goods, chattels or effects distrained, a
copy of which signed by himself shall be left
either with the owner or person from
whose possession the goods, chattels or
effects are taken, or at the dwelling or place
of business of that person and with
someone of suitable age and discretion, to
which list shall be added a statement of the
sum demanded and a note of the time and
place of sale (Sec. 175[b], LGC)
The officer shall forthwith cause a
notification to be exhibited in not less than
three (3) public and conspicuous places in
the territory of the local government unit
where the distraint is made, specifying the
time and place of sale, and the articles
distrained.(Sec. 175[c], LGC)

Note: The time of sale shall not be less than

twenty (20) days after the notice to the owner
or possessor of the property as above

specified and the publication or posting of the

notice. One place for the posting of the notice
shall be at the office of the chief executive of
the local government unit in which the
property is distrained. (Sec. 175[c], LGC)

At the time and place fixed in the notice,

the officer conducting the sale shall sell the
goods or effects so distrained:
a. At a public auction;
b. To the highest bidder for cash

Note: Within five (5) days after the sale, the

local treasurer shall make a report of the
proceedings in writing to the local chief
executive concerned (Sec. 175 [e], LGC)

Note: If at any time prior to the consummation

of the sale, all the proper charges are paid to
the officer conducting the sale, the goods or
effects distrained shall be restored to the
owner (Sec. 175[d], LGC)

Should the property distrained be not disposed of

within one hundred and twenty (120) days from
the date of distraint, the same shall be considered
as sold to the local government unit concerned
for the amount of the assessment made thereon
by the Committee on Appraisal and to the extent
of the same amount, the tax delinquencies shall
be cancelled. (Sec. 175 [e], LGC)
The proceeds of the sale shall be applied to
satisfy the tax, including the surcharges, interest,
and other penalties incident to delinquency, and
the expenses of the distraint and sale.

Note: The expenses chargeable upon the seizure and

sale shall embrace only the actual expenses of the
seizure and preservation of the property pending the
sale, and no charge shall be imposed for the services
of the local officer or his deputy. (Sec. 175[f], LGC)

Where the proceeds of the sale are insufficient to

satisfy the claim, other property may, in like

manner, be distrained until the full amount due,
including all expenses, is collected (Sec. 175 [f],
LGC)

Note: The balance over and above what is required

to pay the entire claim shall be returned to the
owner of the property sold. (Sec. 175 [f], LGC)

SUMMARY FOR PROCEDURE FOR LEVY

Failure of the person owing any local tax,
fee, or charge to pay the same at the
time required. (Sec. 176, LGC)

The provincial city or municipal treasurer

shall:
a. prepare a duly authenticated
certificate
b. showing the name of the
taxpayer and the amount of
the tax, fee, or charge, and
penalty due from him. (Sec.
176, LGC)

Written notice of the levy shall be mailed

to or served upon the:
a. assessor and
b. Register of Deeds of the
province or city where the
property is located who shall
annotate the levy on the tax
declaration and certificate of
title of the property,
respectively, and
c. delinquent taxpayer or,
d. if he be absent from the
Philippines, to his agent or the
manager of the business in
respect to which the liability
arose, or
e. if there be none, to the
occupant of the property in
question. (Sec. 176, LGC)
Report on levy within ten (10) days from
levy by the levying officer. (Sec. 176, LGC)
Levy of real property before,
simultaneously or after distraint of
personal property belonging to the
delinquent taxpayer.
Advertisement of the sale of the property
through sale or auction within 30 days
after levy. The advertisement shall be
effected by:
a. Posting notice in the main
entrance of the municipal

building or city hall and

conspicuous place in the
barangay where the real
property is located
b. Publication once a week for 3
consecutive weeks in a
newspaper of general
circulation in the province, city
or municipality where the
property is located. (Sec. 178,
LGC)
Sale of levied property (Sec. 178, LGC)
Within thirty (30) days after the sale, the
local treasurer or his deputy shall make a
report of the sale to the sanggunian
concerned, and which shall form part of
his records. (Sec. 178, LGC)
Issuance of the certificate of sale to the purchaser. (Sec. 178, LGC)
The delinquent taxpayer has one
(1) year from the date of sale to
redeem the property. If property is
redeemed, a certificate of
redemption will be issued (Sec.
179, LGC)
If property is not
redeemed, a final
deed of sale shall be
issued to the
purchaser. (Sec. 180,
LGC)
The local treasurer shall
purchase the property on
behalf of the LGU if:
a. There is no bidder
b. The highest bid is
insufficient to pay
the deficiency tax
(Sec. 181, LGC)
If not redeemed, ownership shall
be fully vested on the LGU
concerned. (Sec 181, LGC)

Q: May the levy of real property be

simultaneously issued with the warrant of
distraint?

A: Yes. The levy of a real property may be made

before or simultaneous with distraint. In case the
levy on real property is not issued before or
simultaneously with the warrant of distraint on
personal property, and the personal property of
the taxpayer is not sufficient to satisfy his
delinquency, the provincial, city or municipal
treasurer, as the case may be, shall within thirty
(30) days after execution of the distraint, proceed
with the levy on taxpayer s real property. (Sec.
176, LGC)

Q: When may LGU purchase real property

advertised for sale?

A:
1. No bidder for the real property
2. If the highest bid is for an amount
insufficient to pay the taxes, fees, or
charges, related surcharges, interests,
penalties and costs

Further Distraint or Levy

Q: May the local government repeat the

remedies of distraint and levy?

A: The remedies by distraint and levy may be

repeated if necessary until the full amount due,
including all expenses, is collected. (Sec. 184, LGC)

Exemption of Personal Property from

Distraint or Levy

Q: What are the properties exempt from

distraint or levy?

A: The following property shall be exempt from

distraint and the levy, attachment or execution
thereof for delinquency in the payment of any
local tax, fee or charge, including the related
surcharge and interest: ToBe-ChoP-LBM
1. Tools and implements necessarily used
by the delinquent taxpayer in his trade
or employment;
2. One (1) horse, cow, carabao, or other
Beast of burden, such as the delinquent
taxpayer may select, and necessarilly
used by him in his ordinary occupation;
3. His necessary Clothing, and that of all
his family;
4. Household furniture and utensils
necessary for housekeeping and used
for that purpose by the delinquent
taxpayer, such as he may select, of a
value not exceeding Ten thousand
pesos (P10,000.00)
5. Provisions, including crops, actually
provided for individual or family use
sufficient for four (4) months;
6. The professional Libraries of doctors,
engineers, lawyers and judges;
7. One fishing Boat and net, not exceeding
the total value of Ten thousand pesos
(P10,000.00), by the lawful use of which
a fisherman earns his livelihood; and
8. Any Material or article forming part of a
house or improvement of any real
property. (Sec. 185, LGC)

Penalty on Local Treasurer for Failure to Issue

and Execute Warrant of Distraint or Levy

Q: What is the penalty on the local treasurer for

failure to issue and execute the warrant?

A: Automatically dismissed from service after

notice and hearing, if found guilty of abusing the
exercise thereof by competent authority, without
prejudice to criminal prosecution under the RPC

and other applicable laws. (Sec. 177, LGC)

Procedure for Judicial Action

Q: How does the LGU concerned enforce the

judicial remedy in collection of taxes?

A: The LGU concerned may enforce the collection

of delinquent taxes, fees, charges and other
revenues by civil action in any court of competent
jurisdiction. The civil action shall be filed by the
local treasurer within five (5) years from
delinquent taxes, fees or charges become due.

Note: The local government files an ordinary suit for

the collection of sum of money before the MTC, RTC
or CTA depending upon the jurisdictional amount.

COURT
JURISDICTIONAL AMOUNT

MTC

Original
If principal amount of taxes, fees, exclusive of charges and penalties does not
exceed P300,000 or P400,000 in Metro Manila
RTC

Original
If principal amount of taxes, fees exclusive of charges and penalties exceeds
P300,000 or P400,000 in Metro Manila

Provided, the amount is less than 1 million

Appellate
The RTC shall exercise appellate jurisdiction over all cases decided by the MeTC
,
MTC, and MCTC in their respective territorial jurisdiction
CTA DIVISION

Original
If principal amount of taxes, fees exclusive of charges and penalties is P 1 mil
lion or
above

Appellate
Over appeals from the judgments, resolutions or orders of the RTC in tax collect
ion
cases originally decided by them in their respective jurisdiction.
CTA EN BANC

Appellate
1. Decisions or resolutions over petitions for review of the Court in Divisions
in
the exercise of its exclusive appellate jurisdiction over local taxes decided by
the RTC in the exercise of their original jurisdiction;
2. Over Petitions for review of the judgments, resolutions or orders of the RTC
in
the exercise of their appellate jurisdiction over tax collection cases originall
y
decided by the MeTC, MTC and MCTC in their respective territorial
jurisdiction.

Note:
JURISDICTION OF COURTS OVER LOCAL TAXATION CASES
1. With the amendment brought by R.A. No. 9282, the CTA now has appellate jurisd
iction over local taxation
cases decided by the RTC in the exercise of its appellate or original jurisdicti
on.
2. Regular judicial courts are not prohibited from enjoining the collection of l
ocal taxes, subject to Rule 58
(preliminary injunction) of the Rules of Court.

TABLE FOR TAXPAYER S REMEDIES FROM ASSESSMENT OF LOCAL TAXES OTHER THAN REAL PROPE
RTY
TAXES LOCAL GOVERNMENT CODE

Start
Local Treasurer (LT) assess local
taxes within 5 years from date they
become due or 10 years from
discovery of fraud (Sec. 195)
LT issues notice of
assessment (Sec. 195, LGC)
Taxpayer files written
protest within 60 days from
receipt of notice of
assessment (Sec. 195, LGC)
yes
no
yes
no
Is protest made
within prescribed
period? (Sec. 195,
LGC)
Assessment
becomes final
LT decides on protest
within 60 days from filing
of protest (Sec. 195, LGC)
LT issues notice
cancelling
partially/wholly
the assessment
(Sec. 195, LGC)
end
yes

MR is denied, file
petition for review
with CTA en banc
Appeal to SC
LT grants
protest?
no
Appeal to CTA division
but if the decision is
from an RTC exercising
appellate jurisdiction,
appeal should be made
directly not to CTA en
banc under Rule 43 of
ROC.
If Division
decides against
taxpayer, file
MR within 15
days with the
same division
Taxpayer appeals to
court of competent
jurisdiction (regular
courts) within 30
days from receipt of
notice or from lapse
of 60 days (Sec. 195,
LGC)

REAL PROPERTY TAXATION

Q: Define real property tax (RPT).

A: Real property tax is a direct tax on the

ownership of lands and buildings or other
improvements thereon not specially exempted,
and is payable regardless of whether the property
is used or not, although the value may vary in
accordance with such factor.

Note: Real property tax is a fixed proportion of

the assessed value of the property being taxed
and requires, therefore, the intervention of
assessors.

It was held in the case of Province of Nueva Ecija

vs. Imperial Mining Co., Inc. G.R. No. 59463,
November 19, 1982 that PD No. 464, the Real
Property Tax Code, changed the basis of real
property taxation adopting the policy of taxing
real property on the basis of actual use, even if
the user is not the owner.

The present law on real property taxation (R.A. 7160,

Local Government Code) adopts actual use of real
property as basis of assessment. (Sec. 199[b], LGC)

ADMINISTRATION OF REAL PROPERTY TAX

Q: What are the local government units

responsible for the administration of real
property tax?

A: LGUs Responsible
1. Provinces
2. Cities
3. Municipalities in Metro Manila Area

Q: What is real property?

A: Subject to the definition given by Article 415 of

the Civil Code:

Art. 415. The following are immovable

property:
(1) Land, buildings, roads and constructions of
all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while
they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in a
fixed manner, in such a way that it cannot be
separated therefrom without breaking the
material or deterioration of the object;
(4)Statues, reliefs, paintings or other objects
for use or ornamentation, placed in buildings
or on lands by the owner of the immovable in
such a manner that it reveals the intention to
attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which may
be carried on in a building or on a piece of
land, and which tend directly to meet the
needs of the said industry or works;
(6) Animal houses, pigeon-houses, beehives,
fish ponds or breeding places of similar
nature, in case their owner has placed them
or preserves them with the intention to have
them permanently attached to the land, and
forming a permanent part of it; the animals in
these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and
waters either running or stagnant;
(9) Docks and structures which, though
floating, are intended by their nature and
object to remain at a fixed place on a river,
lake, or coast;
(10) Contracts for public works, and
servitudes and other real rights over
immovable property. (334a)

Note: An object used indirectly for the general

purpose of the business shall not be treated as real
property.

In Mindanao Bus Co. v. City Assessor of Cagayan de

Oro (1997), Board of Assessment Appeals v. Meralco,
Meralco v Board of Assessment Appeals. The SC has
generally held in these cases that Art 415 CC
provides an exclusive enumeration of what
constitutes real property, For tax purposes,
however, it is common for otherwise personal
properties under the CC to be classified as real
property.

Note: the NIRC and the LGC code prevail in

classifying property for tax purposes.

Q: What is an Improvement?

A: It is a valuable addition made to a property or

an amelioration in its condition, amounting to
more than a mere repair or replacement of parts
involving capital expenditures and labor, which is
intended to enhance its value, beauty or utility or
to adapt it for new or further purposes. (Sec. 199
[m], LGC)

Q: What are the requisites for taxability of an

improvement?

A:
1. Must enhance the value of the property
2. Must be separately assessable
3. Can be treated independently from the
main property

Note: Whenever real property has been divided into

condominium, each condominium owned shall be
separately assessed, for purposes of real property
taxation and other tax purposes to the owner
thereof and tax on each such condominium shall
constitute a lien solely thereof. (Sec. 25, R.A. No.
776, Condominium Act)

Q: May personal properties as defined under the

Civil Code be considered as real property for
purposes of RPT?

A: Yes. Properties considered as personal under

the Civil Code may nonetheless be considered as
real property for tax purposes where said
property is essential to the conduct of business.
The property to be considered as immobilized for
RPT must be essential and a principal element
of an industry without which such industry would
be unable to carry on the principal industrial
purpose for which it was established. (DOCTRINE
OF ESSENTIALITY)

E.g.
1. Gasoline station equipment and
machineries like above ground and
underground tanks, elevated water
tanks, water tanks, gasoline pumps,
computing pumps water pumps, car
washers, car lifts, air compressors, tire
inflators and the like attached to the
pavement and to the shed (Caltex
Phils. v. CBAA, GR No. 50466, May 31,
1982)
2. A mining Company s siltation dam and
decant system are not machineries but
improvements subject to real property

tax. (The Provincial Assessor of

Marinduque v. CA, G.R. No. 170532,
Apr. 30, 2009)

Q: Is the MERALCO pipeline considered real

property?

A: Yes. It is embedded and attached to the land

and cannot be removed therefrom without
dismantling the steel pipes which were welded to
form the pipeline. (Meralco Securities Industrial
Corporation v. CBAA, G.R. No. L-46245 May 31,
1982)

Q: What are the kinds of real property tax and

special levies?

A: REAS
1. Basic Real property tax
2. Additional levy on real property for the
Special Education Fund(Sec. 235, LGC;
3. Additional Ad valorem tax on idle lands
(Sec 236, LGC)
4. Special levy by local government units
(Sec 240, LGC)

Imposed by other laws

1. Socialized Housing Tax (RA 7279, March
24, 1992)
2. LGUs are authorized to impose an
additional one-half percent (0.5%) on
the assessed value of all lands in urban
areas in excess of Fifty Thousand Pesos,
except those from lands which are
exempted from the coverage of RA
7279.

Fundamental Principles

Q: What are the fundamental principles

governing real property taxation?

A:
1. Real property shall be appraised at its
current and fair market value.
2. Real property shall be classified for
assessment purposes on the basis of its
actual use.
3. Real property shall be assessed on the
basis of a Uniform classification within
each local government unit.
4. The appraisal, assessment, levy and
collection of real property tax shall not
be let to any private person.
5. The appraisal and assessment of real
property shall be Equitable. (Sec. 197,
LGC)

Note: Real Property shall be classified, valued and

assessed on the basis of its actual use regardless of
where located, whoever owns it and whoever uses
it. (Sec. 217, LGC)

Nature of Real Property Tax

Q: What are the characteristics of RPT?

A:
1. Direct tax
burden could not be shifted
by the one who pays to another person
2. Ad valorem based on the assessed
value of the property
3. Local tax
1. Imposed on use and not ownership
2. Progressive in character pending to a
certain extent on the use and value of
the property
3. Indivisible single obligation

IMPOSITION OF REAL PROPERTY TAX

Power to Levy Real Property Tax

Q: What is the nature and scope of power to

impose realty tax?

A: The taxing power of local governments in real

property taxation is a delegated power. (Sec. 232,
LGC)

Q: What is the extent of the local taxing power

in real property taxation?

A: Provinces, cities and municipalities do not only

have the power to levy real estate taxes, but they
may also fix real estate tax rates. Sec. 233 of the
LGC provides that they shall fix a uniform rate of
basic real property tax applicable to their
respective localities.

Note: No public hearing shall be required before the

enactment of a local tax ordinance levying the basic
real property tax.

Q: What real properties are subject to tax?

1. For Basic Real Property Tax and Special

Levy on Education Fund:
a. Real Property such as:
b. Land
c. Building
d. Machinery
e. Other improvements (Sec. 232, GC)

2. For Special Levy on Idle Lands and

Special Levy on Public Works (Special
Assessments):
a. Land only

Q: What are the rates of levy?

A:
1. In the case of a province- at the rate not
exceeding 1% of the assessed value of
2. real property; and
3. In the case of a city or a municipality
within the Metro Manila area- at the
rate not exceeding 2% of the assessed
value of real property. (Sec. 233, LGC)

Q: What must an ordinance imposing special

levy for public works contain?

A:
1. The ordinance shall

a. Describe the nature, extent,

and location of the project;
b. State estimated cost;
c. Specify metes and bounds by
monuments and lines
2. It must state the number of annual
installments, not less than 5 years nor
more than 10 years.

Note: In the apportionment of special

levy, Sanggunian may fix different rates
depending whether such land is more or
less benefited by the proposed work

3. Notice to the owners and public hearing

(Sec. 242, LGC)
4. Owner can appeal to the LBAA and
CBAA

Q: What is the special levy or special assessment

by LGUs?

A:
GR: A province, city or municipality may
impose a special levy on the lands within its
territorial jurisdiction specially benefited by
public works projects or improvements by the
LGU concerned.

Note: Special levy shall not exceed 60% of the

actual cost of such projects and improvements,
including the costs of acquiring land and such
other real property in connection therewith.

XPN: It shall not apply to lands exempt from

basic real property tax and the remainder of
the land, portions of which have been
donated to the LGU concerned for the
construction of such projects or
improvements. (Sec. 240, LGC)

Note: The special levy shall not exceed 60% of

the actual cost of such projects and

improvements, including the costs of acquiring

land and such other real property in connection
therewith.

Q: What is the additional levy on real property

for the Special Education Fund?

A: A province, city or a municipality within the

Metro Manila area may levy and collect an annual
tax of one percent (1%) on the assessed value of
real property which shall be in addition to the
basic real property tax. The proceeds thereof shall
exclusively accrue to the Special Education Fund
created under R.A. 5447. (Sec. 235, LGC)

Q: What is the additional ad valorem tax on idle

lands?

A: A province or city
Metro Manila area may
lands at the rate not
of the assessed value
be in addition to the
236, LGC)

or a municipality within the

levy an annual tax on idle
exceeding five percent (5%)
of the property which shall
basic real property tax. (Sec.

Q: What can be considered as idle lands?

A:
1. Agricultural lands:
a. more than one (1) hectare in area
b. suitable for cultivation, dairying,
inland fishery, and other
agricultural uses
c. one-half (1/2) of which remain
uncultivated or unimproved by the
owner or person having legal
interest.

Note: Agricultural lands planted to

permanent or perennial crops with at

least fifty (50) trees to a hectare shall
not be considered idle lands. Lands
actually used for grazing purposes
shall likewise not be considered idle
lands.

2. Lands other than agricultural:

a. Located in a city or municipality
b. More than one thousand (1,000)
square meters in area
c. One-half (1/2) of which remain
unutilized or unimproved by the
owner or person having legal
interest.

Regardless of land area, this

Section shall apply to residential
lots in subdivisions duly approved
by proper authorities, the
ownership of which has been
transferred to individual owners,
who shall be liable for the
additional tax: Provided, however,
That individual lots of such
subdivisions, ownership of which
has not been transferred to the
buyer shall be considered as part
of the subdivision, and shall be
subject to the additional tax
payable by subdivision owner or
operator. (Sec. 237, LGC)

Q: What causes exemption from idle lands tax?

A:
1. Force majeure
2. Civil disturbance
3. Natural calamity
4. Any cause or circumstance which
physically or legally prevents the owner
or person having legal interest from
improving, utilizing or cultivating the
same. (Ibid.)

Q: What is the purpose of imposing ad valorem

taxes on idle land?

A: To penalize property owners who do not use

their property productively. It is also designed to
encourage utilization of land resources in order to
contribute to national development.

Q: A city outside of Metro Manila plans to enact

an ordinance that will impose a special levy on
idle lands located in residential subdivisions
within its territorial jurisdiction in addition to
the basic real property tax. If the lot owners of a
subdivision located in the said city seeks your
legal advice on the matter, what would your
advice be? Discuss.

A: I would advise the lot owners that a city, even

if it is outside Metro Manila, may levy an annual
tax on idle lands at the rate not exceeding five
percent (5%) of the assessed value of the
property which shall be in addition to the basic
real property tax. (Sec. 236, LGC) I would likewise
advise them that the levy may apply to residential
lots, regardless of land area, in subdivisions duly
approved by proper authorities, the ownership of
which has been transferred to individual owners
who shall be liable for the additional tax. (Last
par., Sec. 237, LGC)

Finally, I would advise them to construct or place

improvements on their idle lands by making
valuable additions to the property or

ameliorations in the land's conditions so the lands

would not be considered as idle. (Sec. 199[m],
LGC) In this manner their properties would not be
subject to the ad valorem tax on idle lands. (2005
Bar Question)

Exemption from Real Property Tax

Q: Under the Local Government Code, what

properties are exempt from real property taxes?

A: RP-PWC
1. Real property owned by the Republic of
the Philippines or any of its political
subdivisions except when the
beneficial use thereof has been granted
for consideration or otherwise to a
taxable person.

2. Charitable institutions, churches,

parsonages, or convents appurtenant
thereto, mosques, non-profit or
religious cemeteries, and all lands,
buildings, and improvements actually,
directly and exclusively used for
religious, charitable, or educational
purposes.

Note: the tax exemption herein rest on

the premise that they are actually, directly
and exclusively used by said entities or
institution s for their stated purposes and
not necessarily because they are owned
by religious, charitable or educational
institutions.

3. All machineries and equipment that are

actually, directly and exclusively used by
local Water utilities and governmentowned or controlled corporations
engaged in the supply and distribution
of water and/or generation and
transmission of electric power.

4. All real property owned by duly

registered Cooperatives as provided for
under RA 6938.

5. Machinery and equipment used for

Pollution control and environmental
protection. (Sec. 234, LGC) (2002 Bar
Question)

Note: Pollution control and infrastructure

devices refers to infrastructure,
machinery, equipment and/or
improvements used for impounding,
treating or neutralizing, precipitating,
filtering, conveying and cleansing mine
industrial waste and tailings as well as
eliminating or reducing hazardous effects
of solid particles, chemicals, liquids or
other harmful by products and gases
emitted from any facility utilized in mining
operations for their disposal (R.A.No.
7942, Sec. 3,am)

Except as herein provided, any

exemption from payment of real
property tax previously granted to, or
presently enjoyed by all persons,
whether natural or juridical, including
all government-owned or controlled
corporations, are hereby withdrawn
upon the effectivity of the LGC.

Note: A taxpayer claiming exemption must submit

sufficient documentary evidence to the local
assessor within thirty (30) days from the date of the
declaration of real property; otherwise, it shall be
listed as taxable in the Assessment Roll. (Sec. 206,
LGC)

Q: The Light Rail Transit Authority (LRTA)

resolutely argues that the improvements such
as, carriageways, passenger terminal stations
and similar structures, not of its properties, but
of the government-owned national roads to
which they are immovably attached. They are
thus not taxable as improvements under the
Real Property Tax Code. It contends that to

impose a tax on the carriageways and terminal

stations would be to impose taxes on public
roads.

Are the LRT improvements subject to real

property tax?

A: Yes. While it is true that carriageways and

terminal stations are anchored, at certain points,
on public roads, said improvements do not form
part of the public roads since the former are
constructed over the latter in such a way that the
flow of vehicular traffic would not be impaired.
The carriageways and terminals serve a function
different from the public roads. The former are
part and parcel of the light rail transit (LRT)
system which, unlike the latter, are not open to
use by the general public. The carriageways are
accessible only to the LRT trains, while the
terminal stations have been built for the
convenience of LRTA itself and its customers who
pay the required fare. Even granting that the
national government owns the carriageways and
terminal stations, the property is not exempt
because their beneficial use has been granted to

LRTA which is a taxable entity. (LRTA v. CBAA,

G.R. No. 127316, Oct. 12, 2000)

Q: Are the airport lands and buildings of Manila

International Airport Authority (MIAA) exempt
from real estate tax under existing laws?

A: Yes. First, MIAA is not a government-owned or

controlled corporation but an instrumentality of
the National Government and thus exempt from
local taxation. MIAA is a government
instrumentality vested with corporate powers to
perform efficiently its governmental functions.
MIAA is like any other government
instrumentality; the only difference is that MIAA
is vested with corporate powers. Second, the real
properties of MIAA are owned by the Republic of
the Philippines and thus exempt from real estate
tax. Airport lands and buildings are outside the
commerce of man. The airport lands and
buildings of MIAA are devoted to public use and
thus are properties of public dominion. (MIAA v.
CA, City of Paranaque, et al., G.R. No. 155650, July
20, 2006)

MCIAA Case as Opposed to MIAA Case

Since the last paragraph
of Section 234
unequivocally withdrew
upon the effectivity of the
LGC, exemption from
payment of real property
tax granted to natural or
juridical persons including
government-owned or
controlled corporations,
except as provided in the
said section, and the
petitioner is, undoubtedly
a government-owned
corporation it necessarily
follows that its exemption
from such tax granted it in
Section 14 of its Charter,
RA No. 6958, has been
withdrawn. Furthermore,
note that Section 40(a) of
PD 464 as reproduced in
Section 234(a), the phrase
and any governmentowned or controlled
corporation so exempt by

its charter was excluded

in the enumeration of
exemption from real
property tax. (Mactan
Cebu International Airport
Authority v. Marcos, G.R.
No. 120082, September
11, 1996)

MIAA is NOT a
government-owned or
controlled corporation
but an instrumentality of
the National Governemnt.
The exception to the
exemtpion in Sec. 234(a)
does not apply to MIAA
because it is not a taxable
entity under the LGC.
Such exception applies
only if the beneficial use
of real property owned by
the Republic is given to a
taxable entity. (Manila
International Airport
Authortiy v CA, supra.)

Q: In 1957, R.A. 2036 granted RCPI a 50 year

franchise and Sec. 14 thereof mandates it to pay
the taxes required by law on real estate,
buildings and other personal property except
radio equipment, machinery and spare parts
needed in connection with its business. In
consideration of the franchise, a tax equal to one
and one-half per centum of all gross receipts
from the business transacted under this
franchise by the grantee shall be paid and such
shall be in lieu of any tax collected by any
authority. The municipal treasurer of Tupi, South
Cotabato subsequently assessed RCPI real
property tax on its radio station building,
machinery shed, radio station tower and its
accessories and generating sheds. RCPI
protested such assessment. Is RCPI liable to pay
real property tax on the said properties?

A: Yes. RCPI s radio relay station tower, radio

station building, and machinery shed are real

properties and are thus subject to real property

tax. The in lieu of all taxes clause in Section 14
of R.A. 2036, as amended by R.A. 4054, cannot
exempt RCPI from the real estate tax because the
same Section 14 expressly states that RCPI shall
pay the same taxes on real estate, buildings.
Subsequent legislations have radically amended
the in lieu of all taxes clause in franchises of
public utilities. The Local Government Code of
1991 withdrew all the tax exemptions existing at
the time of its passage
including that of RCPI s
with respect to local taxes like the real property
tax. Also, R.A. 7716 abolished the franchise tax
on telecommunications companies effective 1
January 1996. To replace the franchise tax, R.A.
7716 imposed a 10 percent value-added-tax on
telecommunications companies under Sec.102,
NIRC. Lastly, it is an elementary rule in taxation
that exemptions are strictly construed against the
taxpayer and liberally in favor of the taxing
authority. It is the taxpayer s duty to justify the
exemption by words too plain to be mistaken and
too categorical to be misinterpreted.(Radio
Communications of the Philippines, Inc. v.
Provincial Assessor of South Cotabato, A.C. No.
5637,April 13, 2005)

Q: Napocor entered into a build-operate-transfer

(BOT) agreement with First Private Power
Corporation (FPPC) for the construction of a
power plant in Bauang, La Union and the
creation of Bauang Private Power Corporation
(BPPC), a corporation that will own, manage and
operate the power plant. When BPPC was
assessed for real property taxes on the
machineries and equipment, Napocor sought the

exemption of the machineries and equipment

from RPT on the ground of its exemption from
taxes and the provision under the BOT
Agreement whereby Napocor assumes
responsibility for all real estate taxes. Is Napocor
liable to pay tax?

A: Under Sec. 234(c) of the LGC of 1991,

machineries and equipment actually, directly and
exclusively used by a government-owned or
controlled corporation are exempt from real
property tax. BPPC, not being a GOCC, is not
entitled to the Sec. 234(c) exemption. Napocor,
not being the actual, direct and exclusive user of
the machineries and equipment, cannot invoke
the Sec. 234(c) exemption either. (National Power
Corp. v. CBAA, G.R. No. 171470, January 30, 2009)

Q: Is GSIS exempt from real property taxes?

A: Pursuant to Sec. 33 of P.D. 1146, GSIS enjoyed

tax exemption from real estate taxes, among
other tax burdens, until January 1, 1992 when the
LGC took effect and withdrew exemptions from
payment of real estate taxes privileges granted
under PD 1146. R.A. 8291 restored in 1997 the
tax exempt status of GSIS by reenacting under its
Sec. 39 what was once Sec. 33 of P.D. 1146. If any
real estate tax is due, it is only for the interim
period, or from 1992 to 1996, to be precise. (GSIS
v. City Treasurer and City Assessor of the City of
Manila, G.R. No. 186242, Dec. 23, 2009)

Appraisal and Assessment of Real Property Tax

Q: How is a real property appraised?

A: All real property, whether taxable or exempt,

appraised at the current and fair market value
prevailing in the locality where the property is
situated.(Sec. 201, LGC)

Q: What is the fair market value of properties?

A: Fair market value (FMV) is the price at which a

property may be sold by a seller who is not
compelled to sell and bought by a buyer who is
not compelled to buy. (Sec. 199(I), LGC)

Q: Distinguish fair market value

assessed value .

A:
FAIR MARKET VALUE
ASSESSED VALUE
As to determination
Declared by the owner
subject to final
determination by the
assessor.
Determined by the
application of the
assessment level to the
FMV. It is synonymous to
the taxable value.
As to basis
Supposed to be the actual
value of the real property
in the open market.
Merely a percentage of
the FMV depending on

from

the assessment level of

the property in question.

Q: What are the approaches in estimating the

fair market value of real property for RPT
purposes?

A:
1. Sales analysis approach The sales price
paid in actual market transactions is
considered by taking into account valid
sales data accumulated from among the
Register of Deeds, notaries public,
appraisers, brokers, dealers, bank
officials, and various sources stated
under the Local Government Code;
2. Income capitalization approach
The
value of an income-producing property
is no more than the income derived
from it. An analysis of the income
produced is necessary in order to
estimate the sum which might be
invested in the purchase of the
property.
3. Reproduction cost approach a formal
approach used exclusively in appraising
manmade improvements such as
buildings and other structures, based on
such data as materials and labor costs
to reproduce a new replica of the
improvement. (Allied Banking
Corporation, et. al., v. Quezon City
Government, G.R. No. 154126, Oct. 11,
2005)

Q: How is the fair market value (FMV)

determined?

A:
a. Assessor of the province/city or
municipality may summon the
owners of the properties to be
affected and may take depositions
concerning the property, its
ownership, amount, nature and value
(Sec. 213, LGC)

b. Assessor prepares a schedule of FMV

for different classes of properties.
c. The schedule of FMV is published in a
newspaper of general circulation in
the province, city or municipality
concerned or in the absence thereof,
shall be posted in the provincial
Capitol, city or municipal hall and in
two other conspicuous public places
therein (Sec. 212, LGC)
d. General revision of property
assessment is made (Sec. 219, LGC)
e. Sanggunian enacts a real property tax
ordinance.

Q: Quezon City passed an ordinance which

contains a proviso, to wit:

The parcels of land sold, ceded, transferred and

conveyed for remuneratory consideration after
the effectivity of this revision shall be subject to
real estate tax based on the actual amount
reflected in the deed of conveyance or the
current approved zonal valuation of the Bureau
of Internal Revenue prevailing at the time of the
sale, cession, transfer and conveyance, whoever
is higher, as evidenced by the certificate of
payment of the capital gains tax issued
therefore.

Is the said proviso valid?

A: No. The said proviso mandates an exclusive

rule in determining the fair market value and
departs from the established procedures such as
sales analysis approach, the income capitalization
approach and reproduction cost approach under
the rules implementing the statute. (Local
Assessment Regulation No. 1-92) It unduly
interferes with the duties statutorily placed upon
the local assessor by completely dispensing with
his analysis and discretion which the LGC ad the
regulations require to be exercised. (Allied
Banking Corporation, v. Quezon City Government,
G. R. No. 154126, Oct. 11, 2005)

Rule on Appraisal of Real Property

at Fair Market Value

Q: Give the fundamental principles of appraisal,

assessment, levy and collection of real property
taxes.

A: The appraisal, assessment, levy and collection

of real property tax shall be guided by the
following fundamental principles: CAULE
1. Real property shall be appraised at its
Current and fair market value;
2. Real property shall be classified for
assessment purposes on the basis of its
Actual use;
3. Real property shall be assessed on the
basis of a Uniform classification within
each local government unit;
4. The appraisal, assessment, levy and
collection of real property tax shall not
be Let to any private person; and
5. The appraisal and assessment of real
property shall be Equitable. (Sec. 198,
LGC)

Q: What are the limitations of local government

to administer, appraise, levy and collect real
property taxes?

A:
1. Authorization Limitation the Local
Government Code authorizes only
certain LGUs to administer real property
taxation. (Sec. 200, LGC)
2. Fundamental principles of appraisal,
assessment, levy and collection of real
property taxes. (Sec. 198, LGC)
3. The real property taxes collected shall
accrue solely to the benefit of the local
government unit concerned. (Sec. 5,
Art. X, 1987 Constitution)

Q: May local governments impose an annual

realty tax in addition to the basic real property

tax on idle or vacant lots located in residential
subdivisions within their respective territorial
jurisdictions?

A: Not all local government units may do so. Only

provinces, cities, and municipalities within the
Metro Manila area (Sec. 232, Local Government
Code) may impose an ad valorem tax not
exceeding five percent (5%) of the assessed value
(Sec. 236, Ibid.) of idle or vacant residential lots in
a subdivision, duly approved by proper
authorities regardless of area. (Sec.237, Ibid.)
(2000 Bar Question)

Q: The real property of Mr. and Mrs. Angeles,

situated in a commercial area in front of the
public market, was declared in their Tax
Declaration as residential because it had been
used by them as their family residence from the
time of its construction in 1990. However, since
January 1997, when the spouses left for the
United States to stay there permanently with
their children, the property has been rented to a
single proprietor engaged in the sale of

appliances and agri-products. The Provincial

Assessor reclassified the property as commercial
for tax purposes starting January 1998. Mr. and
Mrs. Angeles appealed to the Local Board of
Assessment Appeals, contending that the Tax
Declaration previously classifying their property
as residential is binding. How should the appeal
be decided?

A: The appeal should be decided against Mr. and

Mrs. Angeles. The law focuses on the actual use
of the property for classification, valuation and
assessment purposes regardless of ownership.
Section 217 of the Local Government Code
provides that "real property shall be classified,
valued, and assessed on the basis of its actual use
regardless of where located, whoever owns it,
and whoever uses it". (2002 Bar Question)

Q: Give the steps in the assessment and

collection of real property tax?

A:
1. Declaration of real property.
2. Listing of real property in the
assessment rolls.
3. Appraisal and valuation of real
property.
4. Determination of assessed value and
RPT.
5. Payment and collection of tax.

Q: Define assessed value.

A: Assessed value is the fair market value of the

real property multiplied by the assessment level.
It is synonymous to taxable value. (Sec.199(h),
LGC)

Q: Discuss the procedure in:

1. Preparation of Schedule of Fair Market
Values;
2. Determining the assessed value;
3. Determining the real property tax.

A:
1. Preparation of Schedule of Fair Market
Values
a. A schedule of fair market values
(SMV) is prepared by the
provincial, city and municipal
assessor of the municipalities
within the Metropolitan Manila
Area for the different classes of
real property situated in their
respective local government units.
b. Respective sanggunians enact
ordinance adopting the SMV.
c. The schedule of fair market values
shall be published in a newspaper
of general circulation in the
province, city or municipality
concerned or in the absence
thereof, shall be posted in the
provincial capitol, city or municipal
hall and in two other conspicuous
public places therein. (Sec. 212,
LGC)

2. Determining the assessed value - To

determine the assessed value, the fair
market value of the property is
multiplied by the assessed level as
determined from an ordinance
promulgated by the sanggunian
concerned.

3. Determining the real property tax Real property tax is computed by

multiplying the with the applicable RPT
rate.

Declaration of Real Property

Q: Who shall declare the real property?

A: It shall be the duty of all persons, natural or

juridical, owning or administering real property,
including the improvements therein, within a city
or municipality, or their duly authorized
representative, to prepare, or cause to be
prepared, and file with the provincial, city or
municipal assessor, a sworn statement declaring
the true value of their property, whether
previously declared or undeclared, taxable or
exempt, which shall be the current and fair
market value of the property, as determined by
the declarant. (Sec. 202, LGC)

Q: When is real property declared?

A: Once every 3 years during the period from

January 1 to June 30 commencing with the
calendar year 1992. (Sec. 202, LGC)

Q: Give the rules on the declaration of real

property by the owner or administrator.

A:
For newly acquired
property
For improvement on
property
What to file
Sworn statement containing the fair market value and
description of the property
When to file
File with the assessor
within 60 days from date
of transfer
File within 60 days upon
completion or occupation
(whichever comes earlier)

Q: When is the assessor required to make a

declaration of real property?

A: When any person, by whom real property is

required to be declared under Sec. 202 of the LGC
refuses or fails for any reason to make such
declaration within the time prescribed the
assessor shall himself declare the property in the
name of the defaulting owner, if known, or
against an unknown owner, as the case may be,
and shall assess the property for taxation. (Sec.
204, LGC)

Note: No oath by the assessor is required.

Q: What is the duty of any person transferring

ownership of real property?

A: Any person who shall transfer real property

ownership to another shall notify the assessor

concerned within sixty (60) days from the date of
such transfer. The notification shall include the
mode of transfer, the description of the property
alienated, the name and address of the
transferee. (Sec. 208, LGC)

Q: What is the duty of the Registrar of Deeds

before entering the real property in the registry?

A: It is to require every person who shall present

for registration a document of transfer,
alienation, or encumbrance of real property to
accompany the same with a certificate to the
effect that the real property subject has been
fully paid of all real property taxes due. Failure to
provide such certificate shall be a valid cause for
the refusal of the registration of the document.
(Sec. 209[B], LGC)

Listing of Real Property in Assessment Rolls

Q: What is an assessment roll?

A: It is a listing of all real property, whether

taxable or exempt, located within the territorial
jurisdiction of the local government unit
concerned prepared and maintained by the
provincial, city or municipal assessor.

Note: Real property shall be listed, valued and

assessed in the name of the owner or administrator,
or anyone having legal interest in the property.

The undivided real property may be listed, valued

and assessed in the name of the estate or of the
heirs and devisees without designating them
individually; and undivided real property other than
that owned by a deceased may be listed, valued and
assessed in the name of one or more co-owners

Corporation, partnership, or association shall be

listed, valued and assessed in the same manner as
that of an individual
Real property owned by the Republic of the
Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has been
granted, for consideration or otherwise, to a taxable
person,, shall be listed, valued and assessed in the
name of the possessor, grantee or of the public
entity if such property has been acquired or held for
resale or lease.(Sec. 205, LGC)

Q: Give the procedure on listing of real property

in the assessment roll.

A:
1. Listing of all real property whether
taxable or exempt within the
jurisdiction of LGU
2. All declarations shall be kept and filed
under a uniform classification system to
be established by the provincial, city or
municipal assessor.

Preparation of Schedules of Fair Market Value

Q: When shall the shedule of fair market value

be made?

A: Before any general revision of property

assessment is made pursuant to the provisions of
this Title, there shall be prepared a schedule of
fair market values by the provincial, city and
municipal assessors of the municipalities within
the Metropolitan Manila Area for the different
classes of real property situated in their

respective local government units for enactment

by ordinance of the sanggunian concerned.

Q: Where shall it be published or posted?

A: The schedule of fair market values shall be

published in a newspaper of general circulation in
the province, city or municipality concerned or in
the absence thereof, shall be posted in the
provincial capitol, city or municipal hall and in two
other conspicuous public places therein. (Sec.
212, LGC)

Authority of Assessor to Take Evidence

Q: Can the assessor issue summons, administer

oaths or take depositions?

A: Yes. For the purpose of obtaining information

on which to base the market value of any real
property, the assessor of the province, city or
municipality or his deputy may summon the
owners of the properties to be affected or
persons having legal interest therein and
witnesses, administer oaths, and take deposition
concerning the property, its ownership amount,
nature, and value. (Sec. 213, LGC)

Amendment of Schedule of Fair Market Value

Q: When can there be amendment of the

schedule of the fair market value of the
properties?

A: The provincial, city or municipal assessor may

recommend to the sanggunian concerned
amendments to correct errors in valuation in the
schedule of fair market values. The sanggunian
concerned shall, by ordinance, act upon the
recommendation within ninety (90) days from
receipt thereof. (Sec. 214, LGC)

Classes of Real Property

Q: What are the classes of real property for

assessment purposes?

A:
1. Residential
2. Agricultural
3. Commercial
4. Industrial
5. Mineral
6. Timberland
7. Special

Q: What are the special classes of real property?

A: Lands, buildings, and other improvements

thereon which are:
1. Actually, directly and exclusively used
for hospitals, cultural, or scientific
purposes;
2. Owned and used by local water
districts;
3. Owned and used by Governmentowned or controlled corporations
rendering essential public services in
the supply and distribution of water
and/or generation and transmission of
electric power. (Sec. 216, LGC)

Note: Special classes of real property have

lower assessment level compared with other

classes of real property.

Actual Use of Property as Basis of Assessment

Q: Define

actual use .

A: Actual use refers to the purpose for which the

property is principally or predominantly utilized
by the person in possession thereof. (Sec. 199[b],
LGC)

Note: Unpaid realty taxes attach to the property and

are chargeable against the person who had actual or
beneficial use and possession of it regardless of
whether or not he is the owner. To impose the real
property tax on the subsequent owner which was
neither the owner nor the beneficial user of the
property during the designated periods would not
only be contrary to law but also unjust (Estate of Lim
vs. City of Manila, G.R. No. 90639, February 21,
1990)

Q: What is the basis of real property taxation?

A: The basis of taxing real property is actual use,

even if the user is not the owner. Real property
shall be classified, valued and assessed on the
basis of its actual use regardless of where located,
whoever owns it, and whoever uses it. (Sec. 217,
LGC)

Q: What is the basis for assessment of real

property?

A: Real property shall be classified, valued and

assessed on the basis of its actual use regardless
of location, owner and use. (Sec.217, LGC)

Q: What are the instances when the provincial,

city or municipal assessor or his duly authorized
deputy shall make classification, appraisal and

assessment of real property irrespective of any

previous assessment or taxpayers valuation
thereon?

A:1st GR
1. Real property is declared and listed for
taxation purposes for the 1st time;
2. There is an ongoing General revision of
property classification and assessment;
3. A Request is made by the person in
whose name the property is declared
assessor shall make a classification,
appraisal and assessment or taxpayer's
valuation. (Sec. 220, LGC)

Note: Provided, however, that the assessment of

real property shall not be increased oftener than
once every three (3) years except in case of new
improvements substantially increasing the value of
said property or of any change in its actual use.

Assessment of Real Property

Q: Define assessment.

A: Assessment is the act or process of

determining the value of a property, or
proportion thereof subject to tax, including the
discovery, listing, classification, and appraisal of
properties. (Sec. 199[f], LGC)

Q: What is reassessment?

A: Reassessment is the assigning of new assessed

values to property, particularly real estate, as the
result of a general, partial, or individual
reappraisal of the property.

Q: Define assessment level.

A: Assessment level is the percentage applied to

the fair market value to determine the taxable
value of the property. (Sec. 199[g], LGC)

Q: Who sets the assessment levels?

A: The assessment levels to be applied to the fair

market value of real property to determine its
assessed value shall be fixed by ordinances of the
sangguniang panlalawigan, sangguniang
panlungsod or sangguniang bayan of a
municipality within the Metropolitan Manila Area,
at the rates not exceeding those enumerated
under Sec 218 of the LGC.

Q: What is the effect of assessment?

A: An assessment fixes and determines the tax

liability of the taxpayer. It is a notice to the effect
that the amount therein stated is due as tax and a
demand for payment thereof.

General Revisions of Assessments and

Property Classification

Q: When shall general revisions of assessment

and classification take place?

A: The provincial, city or municipal assessor shall

undertake a general revision of real property
assessments within two (2) years after the
effectivity of this Code and every three (3) years
thereafter. (Sec. 219, LGC)

Date of Effectivity of Assessments or

Reassessment

Q: When shall assessments and reassessments

take effect?

A: All assessments or reassessments made after

the first (1st) day of January of any year shall take
effect on the first (1st) day of January of the
succeeding year: Provided, however, That the
reassessment of real property due to its partial or
total destruction, or to a major change in its
actual use, or to any great and sudden inflation or
deflation of real property values, or to the gross
illegality of the assessment when made or to any
other abnormal cause, shall be made within
ninety (90) days from the date of any such cause
or causes occurred, and shall take effect at the
beginning of the quarter next following the
reassessment. (Sec. 221, LGC)

Assessment of Property Subject to Back Taxes

Q: When is assessment of property subject to

back taxes proper?

A: Real property declared for the first time shall

be assessed for taxes (back taxes) for the period
during which it would have been liable but in no
case of more than ten (10) years prior to the date
of initial assessment: Provided, however, that
such taxes shall be computed on the basis of the
applicable schedule of values in force during the
corresponding period.

If such taxes are paid on or before the end of the

quarter following the date the notice of
assessment was received by the owner, no

interest for delinquency shall be imposed

thereon; otherwise, taxes shall be subject to
interest at the rate of two percent (2%) per
month or a fraction thereof from the date of the
receipt of the assessment until such taxes are
fully paid. (Sec. 222, LGC)

Notification of New or Revised Assessment

Q: When shall the assessor give a written notice

to the person whose property is assessed in case
of new or revised assessment?

A: When real property is assessed for the first

time or when an existing assessment is increased
or decreased, the provincial, city or municipal
assessor shall within thirty (30) days give written
notice of such new or revised assessment to the
person in whose name the property is declared.
The notice may be delivered personally or by
registered mail or through the assistance of the
punong barangay to the last known address of
the person to be served. (Sec. 223, LGC)

Appraisal and Assessment of Machinery

Q: How are Machineries classified? (Sec. 199[o],

LGC)

A:
A. Realty by Destination
machinery
essential to the business

Note: Movable equipments to be

immobilized in contemplation of the
law must first be essential and
principal elements of an industry or
works without which such industry or
works would be unable to function or

carry on the industrial purpose for

which it was established. (Mindanao
Bus Co. v. City Assessor, G.R. no. L17870, September 29, 1962)

B. Realty by Incorporation
permanently attached

Machinery

Appraisal and Assessment of Machinery

a. For brand new machinery, FMV is the

acquisition cost
b. In all other cases:

FMV= REMAINING OF ECONOMIC LIFE x

REPLACEMENT COST (or reproduction cost)
ESTIMATED ECONOMIC LIFE

c. Depreciation allowance:
i. Rate not exceeding 5% of original
cost OR replacement or
reproduction cost for each year of
use;
ii. Remaining value shall be fixed at
not less than 20% of the cost;
iii. Machinery remains useful and in
operation

COLLECTION OF REAL PROPERTY TAX

Date of Accrual of Real Property Tax

Q: When does real property tax accrue?

A: Real property tax for any year shall accrue on

the first day of January. From that date it shall
constitute a lien on the property superior to any
other lien, mortgage, or encumbrance of any kind
whatsoever extinguished only upon the payment
of the delinquent tax. (Sec. 246, LGC)

Collecting Authority

Q: Who shall collect real property tax?

A:
GR: The collection of real property tax with
interest thereon and related expenses, and the
enforcement of the remedies are the
responsibility of the city or municipal treasurer.

XPN: Treasurer may deputize the barangay

treasurer to collect all taxes on real property
located in the barangay, provided that:
1. The barangay treasurer is properly
bonded for the purpose: provided,
further,
2. The premium on the bond shall be paid
by the city or municipal government
concerned. (Sec. 247, LGC)

Duty of Assessor to Furnish Local Treasurer with

Assessment Rolls

Q: What is the duty of the Assessor after

assessment or reassessment?

A: The provincial, city or municipal assessor shall

prepare and submit to the treasurer of the local

government unit, on or before the thirty-first

(31st) day of December each year, an assessment

roll containing a list of all persons whose real

properties have been newly assessed or
reassessed and the values of such properties.
(Sec. 248, LGC)

Notice of Time for Collection of Tax

Q: When is the time for collection of tax?

A: Treasurer shall post the notice of the dates

when the tax may be paid without interest in a
publicly accessible place at the city or municipal
hall. Notice shall likewise be published in a
newspaper of general circulation in the locality
once a week for two (2) consecutive weeks on or
before the thirty-first (31st) day of January each
year in the case of the basic real property tax and
the additional tax for the Special Education Fund
or any other date to be prescribed by the
sanggunian concerned in the case of any other
tax levied under this title. (Sec. 249, LGC)

Periods within which to

Collect Real Property Tax

Q: What is the period of collection of real

property tax?

A:
GR: Within five (5) years from the date taxes
become due.

XPN: In case of fraud or intent to evade

payment - within ten (10) years from
discovery of fraud or intent. (Sec. 270, LGC)

Q: When is the prescriptive period to collect

suspended?

A: The period of prescription within which to

collect shall be suspended for the time during
which: PRO
1. The local treasurer is legally Prevented
from collecting the tax;
2. The owner of the property or the
person having legal interest therein
Requests for reinvestigation and
executes a waiver in writing before the
expiration of the period within which to
collect; and
3. The owner of the property or the
person having legal interest therein is
Out of the country or otherwise cannot
be located. (Ibid.)

Q: Is there any tax discount for

advanced/prompt payment?

A: If the basic real property tax and the additional

tax accruing to the Special Education Fund (SEF)
are paid in advance the sanggunian may grant a
discount not exceeding twenty percent (20%) of
the annual tax due. (Sec. 251, LGC)

Note: For prompt payment

discount not exceeding
10% of annual tax due (Art. 342, IRR)

Payment of Real Property Tax in Instalments

Q: May RPT be paid in installments?

A: Yes. The owner or the person having legal

interest may pay the basic real property tax and
the additional tax for Special Education Fund
(SEF) due without interest in four (4) equal
installments(on or before March
31/June30/September 30/December 31). (Sec.
250, LGC)

Interests on Unpaid Real Property Tax

Q: What is the rate of interest on unpaid real

property tax?

A: The rate is (2%) per month on the unpaid

amount until the delinquent tax shall have been
fully paid. Provided, in no case shall the total
interest on the unpaid tax or portion thereof
exceed thirty-six (36) months. (Sec. 255, LGC)

Condonation of Real Property Tax

Q: What are the instances which the sanggunian

may condone or reduce real property tax?

A: The sanggunian by ordinance passed prior to

the first (1st) day of January of any year and upon
recommendation of the Local Disaster
Coordinating Council, may condone or reduce,
wholly or partially, the taxes and interest thereon
for the succeeding year or years in the city or
municipality affected by the calamity in cases of:
P-Cal-Cro

1. General failure of Crops;

2. Substantial decrease in the Price of
agricultural or agri-based products;
3. Calamity in any province, city or
municipality.

Q: May the President condone or reduce real

property tax?

A: The president may, when public interest so

requires, condone or reduce the real property tax
and interest for any year in any province or city or
a municipality within the Metro. (Sec. 277, LGC)

DISPOSITION OF PROCEEDS

Q: What is the division in the distribution of

proceeds?

A: Proceeds of real property tax, including

interest thereon plus proceeds from the use,
lease or disposition, sale or redemption of
property acquired at a public auction shall be
distributed as follows:

1. In the case of provinces:

a. Province
Thirty-five percent
(35%) shall accrue to the general
fund;
b. Municipality
Forty percent
(40%) to the general fund of the
municipality where the property is
located; and
c. Barangay Twenty-five percent
(25%) shall accrue to the barangay
where the property is located.

2. In the case of cities:

a. City Seventy percent (70%) shall
accrue to the general fund of the
city; and
b. Component barangays Thirty
percent (30%) shall be distributed
among the component barangays

of the cities where the property is

located in the following manner:
i. Fifty percent (50%) shall
accrue to the barangay
where the property is
located;
ii. Fifty percent (50%) shall
accrue equally to all
component barangays of
the city; and

3. In the case of a municipality within the

Metropolitan Manila Area:
a. Metropolitan Manila Authority
Thirty-five percent (35%) shall
accrue to the general fund of the
authority;
b. Municipality
Thirty-five percent
(35%) shall accrue to the general
fund of the municipality where the
property is located;
c. Barangays Thirty percent (30%)
shall be distributed among the
component barangays of the
municipality where the property is
located in the following manner:
i. Fifty percent (50%) shall
accrue to the barangay
where the property is
located;
ii. Fifty percent (50%) shall
accrue equally to all
component barangays of
the municipality. (Sec. 271,
LGC)

Note: The share of each barangay shall be released,

without need of any further action, directly to the
barangay treasurer on a quarterly basis within five
(5) days after the end of each quarter and shall not
be subject to any lien or holdback for whatever
purpose.

Q: How are the proceeds of the additional one

percent SEF tax applied?

A: The proceeds from the additional one percent

(1%) tax on real property accruing to the Special
Education Fund (SEF):

1. Shall be automatically released to the

local school boards. Provided, in case of
provinces, the proceeds shall be divided
equally between the provincial and
municipal school boards
2. The proceeds shall be allocated for the:
a. Operation and maintenance of
public schools;
b. Construction and repair of school
buildings, facilities and equipment;
c. Educational research;
d. Purchase of books and periodicals;
e. Sports development as determined
and approved by the Local School
Board

Q: What happens to proceeds of the tax on idle

lands?

A: It shall accrue to the:

1. Respective general fund of the province
or city where the land is located
2. In the case of a municipality within the
Metropolitan Manila Area, the proceeds
shall accrue equally to the Metropolitan
Manila Authority and the municipality
where the land is located. (Sec. 273,
LGC)

Q: What happens to proceeds of the special

levy?

A: The proceeds of the special levy on lands

benefited by public works, projects and other
improvements shall accrue to the general fund of
the local government unit which financed such
public works, projects or other improvements.
(Sec. 274, LGC)

REMEDIES OF LGUs FOR COLLECTION OF

REAL PROPERTY TAX

Issuance of Notice of Delinquency for Real

Property Tax Payment

Q: What happens when the taxpayer fails to pay

tax on time?

A: When real property tax or other tax imposed

becomes delinquent, the local treasurer shall
immediately cause a notice of the delinquency to
be posted at the main hall and in a publicly
accessible and conspicuous place in each
barangay of the local government unit
concerned. Notice of delinquency shall also be
published once a week for two (2) consecutive
weeks, in a newspaper of general circulation in
the province, city, or municipality.

Local Government s Lien

Q: What are the guidelines in the exercise of

local government lien?

A:
1. A legal claim on the property subject on

the real property tax as security for the

payment of tax obligation.
2. It is constituted on the property subject
to the tax from the date the RPT
accrued, i.e., first day of January. (Sec.
246, LGC)
3. It is superior to any lien, mortgage, or
encumbrance of any kind whatsoever.
(Sec. 246, LGC) in favor of any person,
irrespective of the owner or possessor
thereof. (Sec. 257, LGC)
4. It is enforceable by administrative or
judicial action. (Sec. 257, LGC)
5. It may be extinguished only upon
payment of the tax and related
interests and expenses. (Sec. 246 and
257, LGC)

Remedies in General

Q: What are the remedies of the local

government units for the collection of real
property tax?

A:
1. Administrative action
a. Exercise of lien on the property
subject to tax
i. Superior to all liens, charges
or encumbrances and is
enforceable by
administrative or judicial
action. It is extinguished only
upon payment of tax and
other expenses. (Sec. 257,
LGC)
b. Levy on the real property subject
of the tax
c. Distraint of personal property
2. Judicial action

Q: Discuss the procedure in the levy on real

property subject of RPT.

A: See chart for SUMMARY FOR PROCEDURE FOR

LEVY

Note: The proceeds of the sale in excess of the

delinquent tax, the interest due thereon and the
expenses of sale shall be remitted to the owner of
real property or person having legal interest

The owner shall not be deprived of possession and

to rentals/income thereof until the expiration of the
time allowed for its redemption.

Q: May the owner of the delinquent property

redeem the property?

A: Yes. Within one (1) year from the date of sale,

the owner of the delinquent real property or
person having legal interest therein, or his
representative, shall have the right to redeem the
property upon payment to the local treasurer of
the
1. amount of the delinquent tax;
2. the interest due thereon
3. the expenses of sale from the date of
delinquency to the date of sale
4. plus interest of not more than two
percent (2%) per month on the
purchase price from the date of sale to
the date of redemption. (Sec.261, LGC)

Q: What is the effect of the redemption of the

delinquent property?

A: Such payment shall invalidate the certificate of

sale issued to the purchaser and the owner of the
delinquent real property or person having legal
interest therein shall be entitled to a certificate of
redemption which shall be issued by the local
treasurer or his deputy. (Ibid.)

Note: From the date of sale until the expiration of

the period of redemption, the delinquent real
property shall remain in possession of the owner or
person having legal interest therein who shall be
entitled to the income and other fruits thereof.

Q: What happens in case there is failure to

redeem?

A: In case the owner or person having legal

interest fails to redeem the delinquent property,
the treasurer shall execute a deed conveying to
the purchaser said property, free from lien of the
delinquent tax, interest due thereon and
expenses of sale.

Q: How is distraint of personal property effected

under real property taxation?

A: When notice of delinquency has been

accordingly posted and published, the local
treasurer shall proceed to sell the personal
property of the delinquent taxpayer in order to
satisfy his unpaid obligation. (Sec. 254, LGC)

Q: Quezon City published on January 30, 2006 a

list of delinquent real property taxpayers in 2
newspapers of general circulation and posted
this in the main lobby of the City Hall. The notice
requires all owners of real properties in the list
to pay the real property tax due within 30 days
from the date of publication, otherwise the
properties listed shall be sold at public auction.

Joachin is one of those named in the list. He

purchased a real property in 1996 but failed to
register the document of sale with the register
of Deeds and secure a new real property tax

declaration in his name. He alleged that the

auction sale of his property is void for lack of
due process considering that the City Treasurer
did not send him personal notice. For his part,
the City Treasurer maintains that the publication
and posting of notice are sufficient compliance
with the requirements of the law.

1. If you were the judge, how will you resolve

this issue?
2. Assuming Joachin is a registered owner, will
your answer be the same?

A:
1. I will resolve the issue in favor of
Joachin. In auction sales of property for
tax delinquency, notice to delinquent
landowners and to the public in general
is an essential and indispensable
requirement of law, the non-fulfillment
of which vitiates the same (Tiongco v.
Phil. Veterans Bank, G.R. No. 82782,
Aug. 5, 1992). The failure to give notice
to the right person i.e., the real owner,
will render an auction sale void (Tan v.
Bantegui, G.R. No, 154027, Oct. 24,
2005; City Treasurer of Q.C. v. CA, G.R.
No. 120974, Dec. 22, 1997).

2. Yes. The law requires that a notice of

the auction sale must be properly sent
to Joachin and not merely through
publication (Tan v. Bantegui, G.R. No,
154027, October 24, 2005; Estate of
Mercedes Jacob v. CA, G.R. No. 120435,
Dec. 22, 1997). (2006 Bar Question)

Q: When may LGU purchase real property

advertised for sale?

A:
1. There is no bidder; or
2. The highest bid is for an amount

insufficient to pay the real property tax,

fees, charges, surcharges, interests or
penalties. (Sec. 263, LGC)

Resale of Real Estate Taken for Taxes, Fees or

Charges

Q: May the sanggunian dispose of the real

property acquired?

A: Yes. The sanggunian concerned may, by

ordinance duly approved an upon notice of not
less than twenty (20) days, sell and dispose of the
real property acquired under the preceding
Section at public auction. The proceeds of the
sale shall accrue to the general fund of the local
government unit concerned. (Sec. 264, LGC)

Further Levy Until Full Payment of Amount Due

Q: May a levy be repeated?

A: Levy may be repeated if necessary until the full

amount due, including all expenses, is collected.
(Sec. 265, LGC)

Refund or Credit of Real Property Tax

Q: What is the remedy of a taxpayer in case of

excessive collections?

A: The taxpayer may file a written claim for

refund or credit for taxes and interests with the
local treasurer, in case an assessment of RPT or
any other tax under Real Property Taxation (Title
II, Local Government Code) is found to be:
1. Illegal; or
2. Erroneous (Sec. 253, LGC)

Q: Within what period must the claim for refund

be made?

A: The claim must be filed with the local treasurer

within two (2) years from the date the taxpayer is
entitled to such reduction or adjustment. (Ibid.)

Q: In view of the street widening and cementing

of roads and improvement of drainage and
sewers in the district of Ermita, the City Council
of the City of Manila passed an ordinance
imposing and collecting a special levy on lands in
the district. Jose filed a protest against the
special levy fifteen (15) days after the last
publication of the ordinance alleging that the
maximum rate of sixty percent (60%) of actual
cost of the project allowed under Sec. 240 of the
Local Government Code was exceeded.

Assuming that Jose Reyes is able to prove that

the rate of special levy is more than the
aforesaid percentage limitation, will his protest
prosper?

A: No. His basis for the protest was the

unreasonably excessive payment. Payment under
protest is thus an administrative precondition for
the suit. (1991 Bar Question)

PROCEDURE FOR CLAIM FOR REFUND OR CREDIT

Taxpayer files a written claim for refund

or credit with the treasurer within 2 years
from the date the taxpayer is entitled to
such reduction or adjustment

Provincial or City Treasurer should

decide the claim within 60 days from
receipt of the claim.

In case of denial, appeal to the LBAA

within 30 days as in protest case.

Appeal to CBAA within 30 days if LBAA

gives and adverse decision.

Payment Under Protest

Q: What are the guidelines in paying tax under

protest?

A:
1. No protest shall be entertained unless
the taxpayer first pays the tax. There
shall be annotated on the tax receipts
the words "paid under protest" The
protest in writing must be filed within
thirty (30) days from payment of the tax
to treasurer who shall decide the
protest within sixty (60) days from
receipt.
2. The tax or a portion paid under protest
shall be held in trust by the treasurer
concerned.
3. In the event that the protest is finally
decided in favor of the taxpayer, the
amount or portion of the tax protested
shall be refunded to the protestant, or
applied as tax credit against his existing
or future tax liability.
4. In the event that the protest is denied
or upon the lapse of the sixty day
period, the taxpayer may avail appeal
the assessment before the Local Board
of Assessment Appeals. (Sec. 252, LGC)
5. In case there is adverse decision by the
LBAA, the taxpayer may appeal with the
CBAA within 30 from receipt of the
adverse decision by the LBAA.

XPN: The protest contemplated in Section 252 of

the LGC is needed when there is a question as to
the reasonableness of the amount assessed, not
where the question raised is on the very authority
and power of the assessor to impose the
assessment and of the treasurer to collect the tax.
(Ty v. Trampe, G. R. No. 117577, December 1,
1995)

Repayment of Excessive Collections

Q: When may the taxpayer file a claim for refund

or credit?

A: When an assessment of basic real property tax,

or any other tax levied under this Title, is found to
be illegal or erroneous and the tax is accordingly
reduced or adjusted, the taxpayer may file a
written claim for refund or credit for taxes and
interests with the provincial or city treasurer
within two (2) years from the date the taxpayer is
entitled to such reduction or adjustment. (Sec.
253, LGC)

Taxpayer s Remedies

Q: What are the remedies available to the

taxpayer under real property taxation?

A:
1. Dispute assessment (Protest)
a. Any owner or person having legal
interest in the property who is not
satisfied with the action of the
assessor in the assessment of his
property; or
b. Any owner of real property
affected by a special levy or any
person having legal interest
therein may PROTEST the
assessment by filing an appeal to
the LBAA within 60 days from
receipt of notice of the
assessment.

2. Claim for refund or tax credit

3. Judicial
A. Court Action
i. Appeal to the CTA en banc
within 15 days from receipt in
case of adverse decision by the
CBAA
ii. Appeal by certiorari with the SC
within 15 days from notice in
case of adverse decision by the
CTA.

B. Suit assailing the validity of the tax

sale (Sec. 267, LGC)
a. Deposit of amount for which the
real property was sold together
with interest of 2% per month
from date of sale to the time of
institution of action.

Contesting an Assessment of
Value of Real Property

Q: What is the remedy of a taxpayer contesting

an assessment?

A: Any owner or person having legal interest in

the property not satisfied with the action of the
assessor in the assessment of his property may
within sixty (60) days from the date of receipt of
the written notice of assessment appeal to the
Board of Assessment Appeals of the provincial or
city by filing a petition under oath in the form
prescribed for the purpose, together with copies
of the tax declarations and such affidavits or
documents submitted in support of the appeal.
(Sec. 226, LGC)

Appeal to the Local Board of Assessment

Appeals (LBAA)

Q: What is the composition of the LBAA?

A:
1. The Registrar of Deeds, as Chairman;
2. The provincial or city prosecutor as
member;
3. The provincial or city engineer as a
member. (Sec. 227, LGC)

Q: What is the jurisdiction of the LBAA?

A: Jurisdiction to hear appeals of owners or

persons having legal interest of owners having
legal interest in a property who are not satisfied
with the action of the assessor on an assessment.

Note: In the exercise of its appellate jurisdiction, the

LBAA shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take
depositions, and issue subpoena and subpoena
duces tecum. The proceedings of the Board shall be
conducted solely for the purpose of ascertaining the
facts without necessarily adhering to technical rules
applicable in judicial proceedings. (Sec. 229[b], LGC)

Q: Within what period should the appeal be

decided?

A: The LBAA shall decide the appeal within one

hundred twenty (120) days from the date of
receipt of such appeal. The Board, after hearing,
shall render its decision based on substantial
evidence or such relevant evidence on record as a
reasonable mind might accept as adequate to
support the conclusion. (Sec 229[a], LGC)

Appeal to the Central Board of

Assessment Appeals (CBAA)

Q: What is the composition of the CBAA?

A: It shall be composed of:

1. A Chairman; and
2. Two (2) members. (Sec. 230, LGC)

Q: What is the jurisdiction of the CBAA?

A: Jurisdiction to hear appeals from the decision

of Local Board of Assessment Appeals. (Sec.
229[c], LGC)

Note: The CBAA can be appointed by the Supreme

Court to act as a court-appointed fact finding
commission to assist the Court in resolving the
factual issues raised in the cases before it. In that
regard, the CBAA is not acting in its appellate
jurisdiction. (Mathay v. Undersecretary of Finance,
En banc Minute Resolution, Nov. 5, 1991)

The owner of the property or the person having legal

interest therein or the assessor who is not satisfied
with the decision of the Board may, within thirty (30)
days after receipt of the decision of said Board,
appeal to the Central Board of Assessment Appeals,
as herein provided. The decision of the Central
Board shall be final and executory. (Sec. 230, LGC)

Q: Does the CBAA have the authority to hear

purely legal issues?

A: No. Such authority is lodged with the regular

courts. Thus, the issue of whether R.A. 7160
repealed P.D. 921, is an issue which does not find
referral to the CBAA before resort is made to the
courts. (Ty, v. Trampe, G.R. No. 117577.
December 1, 1995)

Q: A Co., a Philippine corporation, is the owner

of machinery, equipment and fixtures located at
its plant in Muntinlupa City. The City Assessor
characterized all these properties as real
properties subject to the real property tax. A Co.
appealed the matter to the Muntinlupa Board of
Assessment Appeals. The Board ruled in favor of
the City. A Co. brought a petition for review
before the CTA to appeal the decision of the City
Board of Assessment Appeals. Is the Petition for
Review proper? Explain.

A: No. The CTA s devoid of jurisdiction to

entertain appeals from the decision of the City
Board of Assessment Appeals. Said decision is
instead appealable to the Central Board of
Assessment Appeals, which under the Local
Government Code, has appellate jurisdiction over
decisions of Local Board of Assessment Appeals.
(Caltex Phils. v. CBAA, G.R. No. L50466, May 31,
1982).(1999 Bar Question)

Effect of Appeal on the

Payment of Real Property Tax

Q: What is the effect of appeal on the payment

of real property tax?

A: Appeal on assessments of real property shall,

in no case, suspend the collection of the
corresponding realty taxes on the property
involved as assessed but without prejudice to
subsequent adjustment depending upon the final
outcome of the appeal. (Sec. 231, LGC)

Payment of Real Property Under Protest

Q: Why is there a need of prior payment before

protest may be entertained by the courts?

A: The basis for requiring payment before protest

can be entertained is that taxes are the lifeblood
of the nation and as such collection cannot be
restrained by injunction or any like action.
(Manila Electric Company v. Barlis, et. al., G.R. No.
114231, May 18, 2001)

Q: Give the rules as to the necessity of paying

real property tax prior to protest.

A:
GR: The taxpayer must pay the real property
tax assessed prior to protesting a real property
tax assessment. (Sec. 252, LGC)

XPN: The payment of the tax prior to protest is

not necessary where the taxpayer questions
the authority and power of the assessor to
impose the assessment and of the treasurer to
collect the tax. (Ty, et. al., v. Trampe, G.R. No.
117577. December 1, 1995)

Note: The protest contemplated under Section 252

is required where there is a question as to the
reasonableness or correctness of the amount
assessed. Hence, if a taxpayer disputes the
reasonableness of an increase in a real property tax
assessment, he is required to first pay the tax
under protest. Otherwise, the city or municipal
treasurer will not act on his protest. (Ibid.)

Q: The Province of Quezon assessed Mirant

Pagbilao Corporation (Mirant) for unpaid real
property taxes. Napocor, which entered into a
Build-Operate-Transfer (BOT) Agreement with

Mirant, protested the assessment before the

Local Board of Assessment Appeals (LBAA),
claiming entitlement to the tax exemptions
provided under Section 234 of the Local
Government Code (LGC). The real property taxes
assessed were not paid prior to the protest. The
LBAA dismissed Napocor s petition for
exemption for its failure to comply with Section
252 of the LGC requiring payment of the assailed
tax before any protest can be made. The Central
Board of Assessment Appeals (CBAA) ultimately
dismissed Napocor s appeal for failure to meet
the requirements for tax exemption; however,
the CBAA agreed with Napocor s position that
the protest contemplated in Section 252 (a) is
applicable only when the taxpayer is questioning
the reasonableness or excessiveness of an
assessment. The CBAA ruled that the
requirement of payment prior to protest does
not apply where the legality of the assessment is
put in issue on account of the taxpayer s claim
that it is exempt from tax. The Court of Tax
Appeals (CTA) en banc agreed with the CBAA s
discussion.

1. If the taxpayer claims that the property is

exempt from real property tax, is the
taxpayer required to pay the tax pursuant
to Section 252?
2. Is Napocor s action before the LBAA
prematurely filed?

A:
1. Yes. By claiming exemption from realty
taxation, Napocor is simply raising a
question of the correctness of the
assessment. As such, the real property
tax must be paid prior to the making of
a protest. On the other hand, if the
taxpayer is questioning the authority of
the local assessor to assess real
property taxes, it is not necessary to
pay the real property tax prior to the
protest. A claim for tax exemption,
whether full or partial, does not
question the authority of local assessor
to assess real property tax.

2. Yes. It was an ill-advised move for

Napocor to directly file an appeal with

the LBAA under Section 226 without

first paying the tax as required under
Section 252. Sections 252 and 226
provide successive administrative
remedies to a taxpayer who questions
the correctness of an assessment.
Section 226, in declaring that any
owner or person having legal interest in
the property who is not satisfied with
the action of the provincial, city, or
municipal assessor in the assessment of
his property may appeal to the Board of
Assessment Appeals, should be read in
conjunction with Section 252 (d), which
states that in the event that the protest
is denied, the taxpayer may avail of the
remedies as provided for in Chapter 3,
Title II, Book II of the LGC [Chapter 3
refers to Assessment Appeals, which
includes Sections 226 to 231]. The
action referred to in Section 226 (in
relation to a protest of real property tax
assessment) thus refers to the local
assessor s act of denying the protest
filed pursuant to Section 252. Without
the action of the local assessor, the
appellate authority of the LBAA cannot
be invoked. Napocor s action before the
LBAA was thus prematurely filed.
(NAPOCOR v. Province of Quezon and
Municipalilty of Pagbilao, G.R. No.
171586, January 25, 2010)

Taxpayer s Remedies Involving Collection of Real Property Tax

e

Assessor submits assessment roll

to Local Treasurer on or before
the 31st of December each year.
(Sec. 248, LGC)

Posting of notice of deadline for

payment at a conspicuous place
at the LGU once a week for two
consecutive weeks. (Sec. 249,
LGC)
Taxpayer pays the tax then files a
protest within thirty (30) days
from payment of the tax with the
treasurer who shall decide within
sixty (60) days from receipt (Sec.
252[a], LGC)

Protest decided in
favour of the taxpayer,
the amount or portion of
the tax protested shall
be refunded or applied
as tax credit (Sec. 252
[c], LGC)
Protest is denied or upon the
lapse of sixty (60) day period in
which the treasurer must decide,
taxpayer may appeal with the
LBAA (Sec. 226, LGC) who shall
decide the appeal within 120
days from receipt (Sec. 229, LGC)
If the LBAA rejects the protest,
the owner may appeal to CBAA
within 30 days from receipt of
decision of the LBAA (Sec. 229
[c], LGC)
Appeal with the CTA if the
taxpayer is not satisfied with the
decision of the CBAA (R.A. 9282)

Local Government Cod

Appeal with the Supreme Court

within 15 days.

Procedure for Levy for Purposes of Satisfying Real Property Taxes

nt Code

Local Governme

Tax constitutes a lien on the property superior to all liens and may only be ext
inguished upon payment of the tax
and charges (Sec. 257, LGC)
Time for payment of real property tax expires (Sec. 258, LGC)
Warrant of levy issued by LT, which has the force of legal execution in the LGU
concerned. (Sec. 258, LGC)
Warrant mailed to or served upon the delinquent owner. Written notice of levy an
d warrant is mailed/served
upon the assessor and the Register of Deeds of the LGU (Sec. 258, LGC)
30 days from service of warrant,
LT shall advertise sale of property
(Sec. 260, LGC)
Before the date of sale the owner may stay
the proceedings by paying the delinquent
tax, interest and expenses of sale (Sec 260,
LGC)
Sale is held
(Sec. 260, LGC)
IF there is a bidder AND highest bid is sufficient to pay real
property tax and related interests and costs, bidder pays
and treasurer reports sale to sanggunian 30 days after the
sale. LT will deliver to purchaser the certificate of sale.
Proceeds of sale in excess of delinquent tax, interest,
expenses of sale remitted to owner. (Sec. 260, LGC)

Within one year from sale, owner may redeem upon

payment of the delinquent tax, interest due, expenses of
sale (from date of delinquency to date of sale), and
additional interest of 2% per month on the purchase price
from date of sale to date of redemption. Delinquent owner
retains possession and right to the fruits. Price paid plus
interest of 2% per month shall be returned to the buyer.
(Sec. 261, LGC)

IF not redeemed, deed of conveyance shall be issued to the

purchaser (Sec. 262, LGC)
IF there is no bidder OR highest bid is
insufficient to pay real property tax and
related interest and costs, LT shall
purchase the prop in behalf of the LGU.

Registrar of Deeds shall transfer the title

of forfeited prop to LGU without need of
Court order.

Within one year from forfeiture, owner

may redeem prop by paying to Treasurer
full amount of tax, interest, costs of sale
(Sec. 263, LGC)

Sanggunian concerned may by ordinance,

sell/dispose by public auction of prop
acquired by forfeiture. (Sec. 264, LGC)
Levy may be repeated until full amount due; including all expenses is collected
(Sec. 265, LGC)

LOCAL TAXATION vs. REAL PROPERTY TAXATION

Comparison
Local Taxation
Real Property Taxation
LGUs authorized to
levy the taxes
Provinces, Cities, Municipalities and
Barangays
Provinces, Cities and Municipalities in Metro
manila Area
Power or Authority to
grant tax exemptions
Expressly provided (Sec. 192, LGC)
No power to grant tax exemptions.
Exemptions from RPT granted under Section
234, LGC is granted by Congress.
Date of Accrual
Unless otherwise provided in the LGC, all
local taxes, fees or charges shall accrue
on the 1st day of January of each year;
however, new taxes, fees or charges or
changes in the rates thereof, shall accrue
on the 1st day of the quarter next
following the effectivity of the ordinance
imposing such new levies or rates. (Sec.
166, LGC)

On the 1st day of January

Manner of payment
Maybe paid in quarterly installments
Four equal installments
Time of payment
Within first 20 days of January or of each
subsequent quarter as the case may be
1st

on or before 31st of March

2nd - on or before the 20th of June

3rd - on or before the 30th of September
4th

on or before 31st of December

Exception: Special Levy

Prescriptive period of
assessment
Within 3 years from the date they
become due
No express provision on prescription of
assessment
Prescriptive period of
collection
Within 5 years from the date
assessment by administrative
action; within 10 years from
discovery of fraud or intent
payment

of
or judicial
the
to evade

Within 5 years from the date they become

due; within 10 years from the discovery of
fraud or intent to evade payment
Remedies
Government Remedies:
1. Government s Lien
2. Civil Remedies
i) Administrative action
(1) Distraint
(2) Levy
ii) Judicial action for tax
collection

Taxpayer s Remedies:
1. Questioning the Constitutionality
of the ordinance before the
Secretary of Justice
2. Protest against the assessment
3. Claims for refund or tax credit

Note:
payment under protest
necessary

is not

Government Remedies:
1. Government s Lien
2. Civil Remedies
a) Administrative action
i) Levy
ii) Distraint
b) Judicial action for tax collection

Taxpayer s Remedies:
1. Questioning the Constitutionality of
the Local Tax Ordinance before the
Secretary of Justice
2. Protest against the assessment with
a) LBAA then to
b) CBAA
3. Claims for refund or tax credit

Note:
payment under protest
necessary

is generally

TARIFF AND CUSTOMS TAXATION

Q: What comprises tariff and customs laws?

A:
1. Provisions of the Tariff and Customs
Code of the Philippines and regulations
issued pursuant thereto; and

2. Other laws and regulations subject to

the enforcement by the Bureau of
Customs of otherwise within its
jurisdiction

Q: What is tariff?

A: It includes:
1. Customs duties, toll or tribute payable
upon merchandise to the general
government;

2. Rate of customs; or

3. List of articles liable to duties.

Q: What are customs duties?

A: It is the name given to taxes on the

importation and exportation of commodities, the
tariff or tax assessed upon merchandise imported
from, or exported to, a foreign country. (Garcia v.
Executive Secretary, G.R. No. 101273, July 03,
1992)

Note: Customs and tariffs are synonymous with one

another because they both refer to taxes imposed
on imported and exported wares, articles or
merchandise.

Q: What are the kinds of tariffs or customs

duties?

A:
1. Regular tariff or customs duties - these
are taxes imposed or assessed upon
merchandise from, or exported to, a
foreign country for the purpose of
raising revenues.

2. Special tariffs or custom duties - these

are additional import duties imposed on
specific kinds of imported articles under
certain conditions. They are imposed
for the protection of consumers and
manufacturers, as well as Philippine
products from undue competition
posed by foreign made products.

Q: What are the other types of fees charged by

the Bureau of Customs?

A:
1. Arrastre charge
2. Wharfage dues
counterpart of license,
charged not for the use of any wharf
but for a special fund known as the Port
Works Fund
3. Berthing fee
4. Harbor fee
5. Tonnage dues

FLEXIBLE TARIFF CLAUSE

Q: What do you understand by the term "flexible

tariff clause" as used in the Tariff and Customs
Code?

A: The term "flexible tariff clause" refers to the

authority given to the President to adjust tariff
rates under Section 401 of the Tariff and Customs
Code, which is the enabling law that made
effective the delegation of the taxing power to
the President under the Constitution. (2001 Bar
Question)

Q: What is provided for under Section 401 of the

Tariff and Customs Code (TCC)?

A: In the interest of national economy, general

welfare and/or national security, and subject to
the limitations provided in the TCC, the President,
upon recommendation of the National Economic
and Development Authority (NEDA), is
empowered to:
1. Increase, reduce or remove existing
protective rates of import duty
(including any necessary change in
classification). The existing rates may be
increased or decreased to any level, in
one or several stages but in no case
shall the increased rate of import duty
be higher than a maximum of one
hundred (100) per cent ad valorem;
2. Establish import quota or to ban
imports of any commodity, as may be
necessary;
3. Impose an additional duty on all
imports not exceeding ten (10%) per
cent ad valorem whenever necessary.

Q: What are the limitations imposed on the

flexible tariff clause?

A:
1. Conduct by the Tariff Commission of an
investigation in a public hearing - The
Commission shall also hear the views
and recommendations of any
government office, agency or
instrumentality concerned. The
Commission shall submit their findings
and recommendations to the NEDA
within thirty (30) days after the
termination of the public hearings. The
NEDA thereafter submits its
recommendation to the President (Sec.
401 paragraph b, TCC).
2. The power of the President to increase
or decrease the rates of import duty
within the abovementioned limits fixed
in the Code shall include the
modification in the form of duty. In such
a case, the corresponding ad valorem or
specific equivalents of the duty with
respect to the imports from the
principal competing foreign country for
the most recent representative period
shall be used as bases (Sec. 401
paragraph c, TCC).

GOVERNMENT AGENCIES CONCERNED

Q: What are the agencies of the Government

tasked to enforce, implement and administer
customs law?

A:
1. Bureau of Customs (BOC); and
2. Tariff Commission (TC)

Bureau of Customs

Q: What are the functions of the Bureau of

Customs?

A: APESSSE
1. Assessment and collection of the lawful
revenues from imported articles and all
other dues, fees, charges, fines and
penalties accruing under the tariff and
customs laws;
2. Prevention and suppression of
smuggling and other frauds upon the
customs;
3. Enforcement of tariff and customs laws
and all other laws, rules and regulations
relating to the tariff and customs
administration;
4. Supervision and control over the
entrance and clearance of vessels and
aircraft engaged in foreign commerce;
5. Supervision and control over the
handling of foreign mails arriving in the
Philippines (for the purpose of
collection of lawful duty on the dutiable
articles thus imported and the
prevention of smuggling through the
medium of such mails);
6. Supervision and control of import and
export cargoes landed or stored in
piers, airports, terminal facilities
including container yards and freight
stations (for the protection of
government revenue);
7. Exercise exclusive original jurisdiction
over seizure and forfeiture cases under
the tariff and customs laws. (Sec. 602,
TCC)

Q: What is the territorial jurisdiction of the

BOC?

A:
1. All seas within the jurisdiction of the
Philippines
2. Customs zone
12 nautical miles of

territorial sea from the baseline

3. Exclusive economic zone
200 nautical
miles from the baseline
4. All coasts, ports, airports, harbors, bays,
rivers and inland waters, whether
navigable or not from the sea (Sec. 603,
TCC)

Q: What is an ecozone?

A: A place specifically designated for the location

of certain industries or business that enjoys tax
exemption privilege. It is also known as a Special
Economic Zone.

Note: An ecozone while geographically within the

Philippines is deemed a separate customs territory
and is regarded in law as foreign soil.

Q: How are transactions within the ecozone

treated?

A:
1. Sales by suppliers from outside the
borders of the ecozone are deemed
exports and are treated as export sales.
2. Conversely, if the sales are made to
persons or entities outside the ecozone
but within the Philippines, such sales

are considered as importations by the

buyers and subject to import duties.

Q: What are the duties of the Collector of

Customs over importation of articles within its
jurisdiction?

A: He shall:
1. Cause all articles entering the
jurisdiction of his district and destined
for importation through his port to be
entered into the customhouse;
2. Cause all such articles to be appraised
and classified;
3. Assess and collect the duties, taxes,
fees and other charges thereon;
4. Hold possession of all imported articles
until the duties, taxes, fees and other
charges are paid. (Sec. 1206, TCC)

Q: The Collector of Customs issued an

assessment for unpaid customs duties and taxes
on the importation of your client in the amount
of P980,000. Where will you file your case to
protect your client's right? Choose the correct
courts/agencies, observing their proper
hierarchy.

1. Court of Tax Appeals

2. Collector of Customs
3. Commissioner of Customs
4. Regional Trial Court
5. Metropolitan Trial Court
6. Court of Appeals
7. Supreme Court

A:
1. Protest with the Collector of Customs
(Sec. 2308, TCC)

2. Appeal to the Commissioner of Customs

(Sec. 2313, TCC).
3. Appeal to the CTA (RA 9282)
4. Petition for Review on Certiorari to the
Supreme Court (Rule 45 of the 1997
Rules of Civil Procedure). (2006 Bar
Question)

Tariff Commission (TC).

Q: What is the nature of the powers of the TC?

A: Investigative and administrative in nature.

Q: What matters may be investigated upon by

the TC?

A: The Commission shall investigate:

1. The administration of and the fiscal and
industrial effects of the tariff and
customs laws of this country now in
forceor which may hereafter be
enacted;
2. The relations between the rates of duty
on raw materials and the finished or
partly finished products;
3. The effects of ad valorem and specific
duties and of compound specific and ad
valorem duties;
4. All questions relative to the
arrangement of schedules and
classification of articles in the several
schedules of the tariff law;
5. The tariff relations between the
Philippines and foreign countries,
commercial treaties, preferential
provisions, economic alliances, the
effect of export bounties and preferential transportation rates;
6. The volume of importations, compared
with domestic production and
consumption;
7. Conditions, causes, and effects relating
to competition of foreign industries
with those of the Philippines, including
dumping and cost of production;

8. In general, to investigate the operation

of customs and tariff laws, including
their relation to the national revenues,
their effect upon the industries and
labor of the country and to submit
reports of its investigation as provided;
and
9. The nature and composition of, and the
classification of, articles according to
tariff commodity classification and
heading number for customs revenue
and other related purposes which shall
be furnished to NEDA, Board of
Investments, Central Bank of the
Philippines, and Secretary of Finance.
(Sec. 505, TCC)

Q: What administrative assistance is required to

be rendered by the Tariff Commission to the
President and Congress?

A: In order that the President and the Congress

may secure information and assistance, it shall be
the duty of the Commission to:
1. Ascertain conversion costs and costs of
production in the principal growing,
producing or manufacturing centers of
the Philippines, whenever practicable;
2. Ascertain conversion costs and costs of
production in the principal growing,

producing or manufacturing centers of

foreign countries of articles imported
into the Philippines whenever such
conversion costs or costs of production
are necessary for comparison with
those in the Philippines;
3. Select and describe representative
articles imported into the Philippines
similar to, or comparable with, those
locally produced; select and describe
articles of the Philippines similar to, or
comparable with, such imported article;
and obtain and file samples of articles
so selected whenever advisable;
4. Ascertain import costs of such
representative articles so selected;
5. Ascertain the grower's, producer's or
manufacturers selling prices in the
principal growing, producing or
manufacturing centers of the
Philippines, of the articles of the
Philippines, so selected;
6. Ascertain all other facts which will show
the difference in, or which affect
competition between, articles of the
Philippines and those imported in the
principal markets of the Philippines;
7. Ascertain conversion costs and costs of
production including effects of tariff
modifications or import restrictions on
prices in the principal growing,
producing or manufacturing centers of
the Philippines, whenever practicable;
and
8. Submit annual reports of these to the
President of the Philippines, copy of
which shall be furnished to the NEDA,
Central Bank of the Philippines,
Department of Finance and the Board
of Investments. (Sec. 506, TCC)

APPLICATION OF TARIFF AND CUSTOMS LAW

Q: When are tariff and customs law applicable?

A: After importation has begun but before

importation is terminated.

Q: When does importation begin and when does

it end?

A:
1. Importation begins when the
conveying vessel or aircraft enters the
jurisdiction of the Philippines with
intention to unload therein.

2. Importation is deemed terminated

upon payment of duties, taxes and
other charges due upon the articles, or
secured to be paid, at the port of entry;
and upon grant of the legal permit for
withdrawal; In case the articles are free
of duties, taxes and other charges, until
they have legally left the jurisdiction of
the customs. (Sec. 1202, TCC)

Note: Intention to unload is essential. Even if the

cargo is not yet unloaded and there is unmanifested
cargo, forfeiture may take place because
importation has already begun.

Q: Why is it important to know whether

importation has already begun or not?

A: It is because the jurisdiction of the BOC to

enforce the provisions of the TCC, including
seizure and forfeiture, begins from the
commencement of importation. The BOC loses
jurisdiction to enforce the TCC after importation
is deemed terminated.

Q: What is meant by the term

Customs Law?

entry

in

A: It has a three-fold meaning:

1. The documents filed at the Customs
house;
2. The submission and acceptance of the
documents; and

3. Customs declaration forms or customs

entry forms required to be
accomplished by passengers of
incoming vessels or passenger planes as
envisaged under Sec. 2505 of the TCCP
(Failure to declare baggage). (Jardeleza
v. People, G.R. No. 165265, February 6,
2006)

CONCEPT OF ARTICLE FOR CUSTOMS DUTY

PURPOSES

All articles when imported from a foreign country

into the Philippines shall be subject to duty upon
each importation even though previously
exported from the Philippines except as
otherwise specifically provided for in the Code or
other laws (Sec. 100, TCCP)

CLASSIFICATION OF ARTICLES SUBJECT TO

TARIFF AND CUSTOMS LAW

Q: What is meant by
and Customs Code?

articles under the Tariff

A: The term articles refer to goods, wares and

merchandise and in general, anything that may be
the subject of importation or exportation. (Sec.
3574, TCC)

Note: The term merchandises may include checks

and money order, as well as dollar bills which are not
legal tender in the Philippines. (Batisda v.
Commsissioner of Customs, 35 SCRA 448)

Q: What is the classification of articles subject to

tariff and customs laws?

A:
1. Articles subject to duty
2. Articles of prohibited importation
3. Articles free from duties subject to
conditions prescribed by law
(conditionally-free importation)
4. Duty free articles- Enterprises located in
special economic zones are allowed to
import capital equipment and raw
materials free from duties, taxes and
other import restrictions. (R.A. 7916)

Prohibited Importations

Q: What articles are prohibited from being

imported to the Philippines?

A:
1. Dynamite, gunpowder, ammunitions

and other explosives, firearms, and

weapons of war, and parts thereof.

XPN: when authorized by law.

2. Written or printed articles in any form

containing any matter advocating or
inciting treason, or rebellion,
insurrection, sedition, or subversion
against the Government of the
Philippines, or forcible resistance to any
law of the Philippines, or containing any
threat to take the life of, or inflict bodily
harm upon any person in the
Philippines.

3. Written or printed articles, negatives or

cinematographic film, photographs,
engravings, lithographs, objects,
paintings, drawings, or other
representation of an obscene or
immoral character.

4. Articles, instruments, drugs and

substances designed, intended or
adapted for producing unlawful
abortion, or any printed matter which
advertises or describes or gives directly
or indirectly information where, how or
by whom unlawful abortion is
produced.

5. Roulette wheels, gambling outfits,

loaded dice, marked cards, machines,
apparatus or mechanical devices used
in gambling or the distribution of
money, cigars, cigarettes, or other
when such distribution is dependent on
chance, including jackpot and pinball
machines or similar contrivances, or
parts thereof.

6. Lottery and Sweepstakes tickets

advertisements thereof and list of

drawings therein.

XPN: Those tickets authorized by the

Philippine Government

7. Any article manufactured in whole or in

part of gold, silver or other precious
metals or alloys thereof, the stamps,
brands or marks or which do not
indicate the actual fineness of quality of
said metals or alloys.

8. Any adulterated or misbranded articles

of food or any adulterated or
misbranded drug in violation of the
provisions of the Food and Drugs Act .

9. Marijuana, opium, poppies, coca leaves,

heroin or any other narcotics or
synthetic drugs which are or may
hereafter be declared habit forming by
the President of the Philippines, or any
compound, manufactured salt,
derivative, or preparation thereof.

XPN:
a. When imported by the Government
of the Philippines

b. Any person duly authorized by the

Dangerous Drugs Board, for medical
purposes only

10. Opium pipes and parts thereof, or

whatever material.

11. All other articles and parts thereof, the

importation of which is prohibited by
law or rules and regulations issued by
competent authority. (Sec 101, TCC)

Q: What is the duty of the Collector of Customs

over articles of prohibited importation?

A: Where articles are of prohibited importation or

subject to importation only upon conditions
prescribed by law, it shall be the duty of the
Collector to exercise such jurisdiction in respect
thereto as will:
1. Prevent importation; or
2. Otherwise secure compliance with all
legal requirements. (Sec. 1207, TCC)

Qualifiedly Prohibited Importation

Where such conditions as to warrant a lawful

importation do not exist, the legal effects of the
importation of the qualifiedly prohibited articles
are the same as those absolutely prohibited
articles (Auyong vs. CTA, G.R. No. L-28782,
September 12, 1974)

Conditionally-free Importation

Q: What are conditionally-free importations?

A: These are imported articles that are allowed to

enter the Philippines free of duties and taxes
after the compliance with certain conditions as
imposed in the Tariff and Customs Code and
other Customs regulation.

Q: What are the kinds of conditionally-free

importations?

A: Those:
1. Provided in Sec. 105, TCC;
2. Granted to government agencies,
instrumentalities and GOCCs in
agreements with foreign countries;
3. Given to international institutions
entitled to exemption by agreement or
special laws;
4. Granted by the President upon
recommendation of NEDA;
5. Those provided in the Code in favor of
RETURNING RESIDENTS with respect to
their personal and household effects:
a. Personal and household effects
including luxury items brought out
of the Philippines and returned;
b. Personal and household effects
except luxury items purchased
abroad and imported to the
Philippines;
c. The purchase abroad of
consumables, livelihood tools,
personal and household effects by
Overseas Filipino Workers (OCW)
and Balikbayans;
d. The purchase abroad of
consumables, livelihood tools,
personal and household effects by
Overseas Filipino Workers (OCW)
and Balikbayans at Philippine
duty-free shops; and
e. Personal and household effects of
members of Philippine diplomatic
missions including civil or military
attaches.

Note: Returning residents for purposes of

conditionally-free importation of personal and
household effect must be those:
a. Nationals (Filipino)
b. who have stayed in the foreign country

c. for a period of AT LEAST six (6) months

Q: What are the conditionally-free importations under Sec. 105 of the TCC?

A:

Articles
Requirements
Exceptions
1. Aquatic products
a. Caught or gathered by fishing vessels of Philippine
registry
b. Imported in such vessels or in crafts attached
thereto
c. Have not landed in any foreign territory; or
d. If so landed, solely for transshipment without
having been advanced in condition

2. Equipment for salvage of vessels and

aircrafts unavailable locally
a. Payment of bond equal to 1 times the
ascertained duties, taxes and other charges (DTO)
thereon
b. Conditioned on:
i. Exportation or
ii. Payment of DTO within 6 months from acceptance
of import entry

3. Cost of repairs made in foreign countries

on Philippine-registered/licensed vessels or
aircrafts
Satisfactory proof to the Collector of Customs of:
a. Adequate facilities for repairs not afforded in the
Philippines
b. Vessel/aircraft was compelled by stress of weather
or other casualty to dock into a foreign port to
secure safety and sea/air-worthiness
c. Excluding the value of the article used

4. Articles brought for repairs, processing or

reconditioning to be exported upon
completion of repairs
Bond in amount equal to 1 times the ascertained DTO
thereon, conditioned on:
a. exportation
b. payment of DTO within 6 months from acceptance
of import entry

5. Medals, badges, cups and other small

articles
Bestowed or received as honorary distinction

6.
a. Personal and household effects of
residents of the Philippines
returning from abroad(include
jewelry, precious stone and other
articles of luxury)
b. Personal and household effects
purchased in foreign countries by
residents of the Philippines which
were necessary, appropriate and
normally used for the convenience
in their journey and during their
stay abroad (include wearing
apparel, articles of personal
adornment, toilet articles, portable
appliances and instruments)
a. Formally declared and listed before departure
b. Identified under oath before Collector
c. Personal and household effects shall neither be in
commercial quantities nor intended for barter,
sale, hire
d. Dutiable value not exceeding P 2,000
e. Returning residents have not previously received
the benefit within 365 days prior to his arrival
f. 50% ad valorem duty across the board shall be
levied in excess of the P 10,000
g. Personal and household effects of returning
residents who have not stayed abroad for 6 months
shall be subject to 50% ad valorem duty across the
board, the total dutiable value of which does not
exceed P 2,000
Vehicles, aircraft and

animals purchased in
foreign countries
necessary, Appropriate,
normally used for comfort
and convenience in their
stay abroad.
7. Wearing apparel, articles of personal
adornment, theatrical costumes and similar
effects accompanying travelers or tourists,
in quantities and kind necessary and suitable
to the profession, rank or position of the
person importing them for their own use.
Written commitment or bond equal to 1 times the
ascertained DTO
Not applicable to articles
intended for other persons
or for barter, sale or hire.
8. Personal and household effects and
vehicles belonging to foreign consultants
In quantities and of the kind necessary and suitable to the
profession, rank or position of the person importing them.

and experts hired by and/or rendering

services to the Government and their staff
or personnel and families.
9. Articles used exclusively for public
entertainment and display and devices for
projecting pictures; technical and scientific
films when imported by the
a. Identification, examination, appraisal
b. Payment of bond equal to 1 times the
ascertained DTO conditioned on:
i. Exportation
ii. payment of DTO within 6 months from
acceptance of import entry
c. Underdeveloped and underexposed outside
the Philippines films require an affidavit by the
importer that such films were previously
exported from the Philippines

10.
a. Importations for the official use of
foreign embassies, legations and
other agencies

b. Articles for personal or family use of

members and attaches of foreign
embassies, legation, consular offices
and foreign representatives
a. Foreign countries accord like privileges to
Philippines agencies
b.
i. Privilege granted upon instruction of the
Secretary of Finance upon request by
the DFA
ii. Privileges must be contained in a special
agreement between the Philippines and
a foreign country

11. Imported articles donated to or for the

account of any duly registered relief
organization not operated for profit
Certified by DSWD and DECS

12. Containers, holders and similar

receptacles of any material for locallymanufactured cement for export
a. Identification, examination, appraisal
b. Payment of bond equal to 1 times the
ascertained duties, taxes and other charges
(DTO) thereon
c. Conditioned on:
i. Exportation or
ii. Payment of DTO within 6 months from
acceptance of import entry
Other containers made of
paper, paperboard and
fabrics which are readily
identifiable and reusable
for shipment
13. Necessary supplies for the reasonable
requirements of the vessel or aircraft in her
voyage outside the Philippines
a. Any surplus or excess of such vessel or aircraft
supplies arriving from foreign ports shall be
dutiable
b. For use or consumption by passengers or its
crew on board

14. Articles and salvage from vessels

recovered after a period of 2 years from the
date of filing of the marine protest
Vessels have been wrecked or abandoned in Philippine
waters (or elsewhere)

15. Coffins or urns containing human

remains, bones or ashes, used personal and
household effects of the deceased

Vehicles the value of

which does not exceed P
10,000
16. Animals and plants for scientific,
experimental, propagation, botanical,
breeding, zoological and national defense
purposes
a. By order of the Government and other duly
authorized institutions
b. Duly registered in the book of record

established for that breed

c. Certificate of record and pedigree of such
animal duly authenticated by the proper
custodian
d. NEDA certification
Race horses
17. Economic, technical, vocational,
scientific, philosophical, historical and
cultural books and/or publications; bibles,
missals, prayer books, Koran Ahadith, other
religious books of similar nature

18. Philippine articles previously exported

from the Philippines and returned without
having advanced in value or improved in
If a drawback or bounty was allowed to any Philippine
article, upon re-importation, article shall be subject to
duty equal to the bounty or drawback

condition by any process of manufacture

19. Aircraft equipment, machinery, spare
parts, commissary and catering supplies,
aviation gas, fuel and oil and such other
articles or supplies imported by and for the
use of scheduled airlines operating under
congressional franchise
a. Such articles or supplies are not available
locally (in reasonable quantity, quality and
price)
b. Articles are necessary or incidental for the
proper operation of airline importing

20. Machineries, equipment, tools for

production plants to convert to mineral ores
into saleable form, spare parts, supplies,
materials and accessories, explosives,
chemicals and transportation and
communication facilities imported by and
for the use of mines
a. Certification of DAR and DENR Secretaries
upon recommendation of Director of Mines
b. Articles are not locally available

21. Spare parts of vessels or aircrafts of

foreign registry engaged in foreign trade
brought into the Philippines exclusively as
replacements and emergency repairs
Satisfactory proof to the Collector of Customs that such
spare parts shall be utilized to secure the safety of the
vessel or aircraft to enable it to continue its voyage or
flight

22. Articles of easy identification exported

from the Philippines for repair
a. Not capable of being repaired locally
b. Cost of repairs made to any such articles shall
pay a rate of duty of 30% ad valorem

23. Trailer chassis imported by shipping

companies for their exclusive use in
handling containerized cargo

a. Posting of bond in amount equal to 1 times

the ascertained duties and other charges
b. Properly identified and registered with the
Land Transportation Commissioner
c. Subject to customs supervision fee fixed by the
Collector of Customs
d. Deposited in the Customs zone when not in
use
e. e. Duties and taxes paid upon the expiration of
the period prescribed UNLESS otherwise reexported

Q: Jacob, after serving a 5-year tour of duty as

military attach in Jakarta, returned to the
Philippines bringing with him his personal effects
including a personal computer and a car. Would
Jacob be liable for taxes on these items? Discuss
fully.

A: No. Jacob would not be liable for the payment of

taxes on his personal effects including a personal
computer and a car provided he is able to prove his
qualification for conditional free importation.
The requirements are:
1. The officer or employee is for
reassignment to his home office, or dies,
resigns or is retired from the service;
2. The motor car must have been ordered
or purchased prior to the receipt by the
mission or consulate of the order of
recall, must be registered in the
employee s name;
3. The personal effects should not exceed
30% of the total amount received by such
employee or officer in salary and
allowances during his latest assignment
abroad but not to exceed four years;
4. The exemption shall not be availed of
oftener than once every four years;
5. The officer or employee concerned must
have served abroad for not less than two
years. (Sec. 105, TCC)

Q: Mr. Balikbayan has a used car among the items

he brought home to the Philippines where he will
resettle permanently after living forty years in
California, USA. He also brought along a VCD
machine and a stereo. Discuss whether or not he is
liable for payment of import duties for bringing to
the Philippines the above-mentioned items.

A: Mr. Balikbayan is considered as a returning

resident entitled to tax and duty free entry of his
VCD machine and stereo, the said articles being
considered as used personal and household effects.
He is, however, required to pay import duties for
the used car which is not considered as part of his
personal and household effects entitled to tax and
duty free entry. (1988 Bar Question)

CUSTOMS DUTIES

Q: What articles are subject to customs duty?

A: All articles imported from any country into the

Philippines, shall be subject to duty upon each
importation, even though previously exported from
the Philippines, except as otherwise specifically
provided for in the Tariff and Customs Code or in
other laws. (Sec. 101, TCC)

Q: Dagat-dagatan Shipping Corp (DSC) brought

into the country two non-propelled foreign barges
which DSC chartered for use in the Philippines
coastwise trade under a temporary Certificate of
Philippine Registration to be returned to the
foreign owner upon the termination of the charter
period but not beyond 2000, pursuant to P.D. No.
780 as amended. Upon arrival, the barges were
subjected to duty by the Bureau of Customs. DSC
refused to pay any customs duty contending that
the chartered or leased barges, which will be
returned to the foreign owner when the charter
expires, is not an importation and therefore
cannot be subjected to any customs duty. Is DSC s
refusal with or without legal basis?

A: DSC s refusal is without legal basis. All imported

articles when imported in the Philippines from a
foreign country are subject to customs duty upon
each importation. The tax exemption granted to
chartered vessels/leased ocean vessels does not
apply to the barges because they are non-propelled
and are to be used for coastwise trade.
(1991 Bar Question)

Q: What is the concept of Preferential Tariffs?

A: It is the imposition of high customs duties which

results to making the foreign goods more expensive
compared with locally produced articles. This is to
protect Philippine manufacturers from competition
posed by foreign manufacturers.

Q: Are there instances where there could be

exemptions from customs duties?

A:
GR: There shall be no exemptions from the
payment of customs duties.

XPNS:
1. Those provided under the Tariffs and
Customs Code (e.g. conditionally-free
importations)
2. Those granted to government agencies,
instrumentalities or government-owned
or controlled corporation with existing
contracts, commitments, agreements, or
obligations (requiring such exemptions)
with foreign countries;
3. International institutions, associations or
organization entitled to exemption
pursuant to agreements or special laws;
4. Those that may be granted by the
President of the Philippines upon

recommendation of the National

Economic Development Authority in the
interest of national economic
development. (Sec. 105, TCC)

Q: Is the Government exempt from customs

duties, taxes, fees and other charges?

A:
GR: All importations by the government for its
own use or that of its subordinate branches or
instrumentalities, or corporations, agencies or
instrumentalities owned or controlled by the
government shall be subject to the duties, taxes,
fee and other charges provided for in the Tariff
and Customs Code. (Sec. 1205, TCC)

XPNs:
1. If expressly exempted under a special law;
2. If imported as conditionally-free
importations.
3. Those granted to government agencies,
instrumentalities or government-owned
or controlled corporations with existing
contracts, commitments, agreements or
obligations (requiring such exemptions)
with foreign countries.

Q: What are the kinds of tariffs or customs duties?

A:
1. Regular tariff or customs duties - these
are imposed and collected merely as a
source of revenue.
2. Special tariffs or custom duties - Those
imposed in addition to the ordinary
customs duties usually to protect local
industries against foreign competition.

Q: What are the kinds of regular customs duties?

Discuss each.

A:
1. Ad valorem duty
Customs duties that
are computed on the basis of value of
imported article
2. Specific duty Customs duties that are
computed on the basis of dutiable weight
of goodi.e. a unit of measure such as per
kilogram, per liter, etc.
3. Compound duty Customs duties that
impose both ad valorem and specific
customs duties. E.g. 10% ad valorem plus
P100 per liter.
4. Alternating duty
alternates between ad
valorem and specific

Q: What are the kinds of special customs duties?

A:
1. Under the Tariff and Customs Code
(Dump-DisCo-Mark)
a. Anti-Dumping duty;
b. Countervailing duty;
c. Marking duty; and
d. Discriminatory duty.
2. Additional tariff imposed as a safeguard
measure under the Safeguard Measure
Act (R.A. 8800).

COMPARISON OF SPECIAL DUTIES

SPECIAL DUTY

NATURE

PURPOSE

AMOUNT/
RATE

IMPOSING
AUTHORITY

JUDICIAL REVIEW

ANTI-DUMPING
DUTY

Imposed on imported
goods where it
appears that a specific
kind or class of foreign
article is being
imported into or sold
or is likely to be sold in
the Philippines at a

price less than its fair

value

To
protect local
industries from
undue
competition

Difference between
the export price and
the normal price

(export price
- normal price
= anti-dumping duty)

Non-agricultural
products:
Secretary of
Trade and
Industry

Agricultural
products:
Secretary of
Agriculture

Any interested party

who is adversely
affected by a final
ruling imposing an
anti-dumping duty
may file with the CTA
a petition for review
within thirty (30) days
from his receipt of
notice of the assailed
decision. But such
appeals shall not stop
or suspend the
imposition of the duty

COUNTER-VAILING
DUTY
Duty equal to the
ascertained or
estimated amount of
the subsidy or bounty
or subvention granted
by the foreign country
on the production,
manufacture, or
exportation into the
Philippines of any
article likely to injure
an industry in the
Philippines
or retard or
considerably retard
the establishment of
such industry

Amount of subsidy
Any interested party
who is adversely
affected by a final
ruling imposing a
countervailing duty
may file with the CTA
a petition for review
within thirty (30) days
from his receipt of
notice of the assailed
decision. But such
appeals shall not stop
or suspend the
imposition of the duty

MARKING DUTY

Duty imposed on an ad
valorem basis imposed
for improperly marked
articles.

To prevent
possible
deception

5% ad valorem of the
goods

Commissioner of
Customs

NONE

DISCRIMINATORY/
RETALIATORY
DUTY

Duty imposed on
imported goods
whenever it is found as
a fact that the country
of origin discriminates
against the commerce
of the Philippines in
such a manner as to
place the commerce of

To protect the

Not exceeding 100%

President of the

the Philippines at a
disadvantage
compared with the
commerce of any
foreign country.
national
interest
ad valorem
Philippines

SAFEGUARD

a. GENERAL
imposed
upon goods or
products imported in
increased quantities

b. SPECIAL volume of
imports exceed a base
trigger level or price
falls below a trigger
price level

To protect
domestic
industries and
producers from
increased
imports

a. GENERAL tariff
increase, either ad
valorem or specific
or both, to be paid
through a cash bond
set at a level

sufficient to redress
or prevent injury to
the domestic
industry

b. SPECIAL
i. Volume Test
ii. Price Test

a. GENERAL
Secretary of
Trade and
Industry and
Secretary of
Agriculture

b. SPECIAL
Secretary of
Agriculture

Any interested party

who is adversely
affected by the ruling
of the Secretary in
connection with the
imposition of a
safeguard measure
may file with the CTA
a petition for review
of such ruling within
thirty (30) days from
receipt thereof BUT
the filing of such
petition for review
shall not in any way
stop, suspend or
otherwise toll the
imposition or
collection of the
appropriate tariff
duties or the adoption
of other appropriate
safeguard measures,
as the case may be.

Q: What is the amount generally imposed as an

anti-dumping duty?

A: The amount imposed shall be equal to the

margin of dumping on such product, commodity or
article and on like product, commodity or article
thereafter imported to the Philippines under similar
circumstances, in addition to ordinary duties, taxes
and charges imposed by law on the imported
product, commodity or article. (Sec. 3(a), R.A. 8752)

Q: What happens when products are not imported

directly from the country of origin but exported to
the Philippines from an intermediate country?
A: The price at which the products are sold from
the country of export to the Philippines shall
normally be compared with the comparable price in
the country of export. However, comparison may
be made with the price in the country of origin if,
for example, the products are merely transshipped
through the country of export, or such products are
not produced in the country of export, or there is
no comparable price for them in the country of
export. (Ibid.)

Q: What are the kinds of specific subsidy?

A:
1. Bounty
cash award paid to an exporter
or manufacturer
2. Subsidy financial incentives not in the
form of direct or cash award to encourage
manufacturers or exporters
3. Subvention
any assistance other than a
bounty or subsidy given by the
government for the manufacture and/or
exportation of an article.

Q: When may the Customs Commissioner exempt

imported articles from the marking requirement?

A: If

1. Such article is incapable of being marked

2. Such article cannot be marked prior to
shipment to the Philippines without injury
3. Such article cannot be marked prior to
shipment to the Philippines, except at an
expense economically prohibitive of its
importation
4. The marking of a container of such article
will reasonably indicate the origin of such
article
5. Such article is a crude substance
6. Such article is imported for use by the
importer and not intended for sale in its
imported or any other form
7. Such article is to be processed in the
Philippines by the importer or for his
account otherwise than for the purpose
of concealing the origin of such article
and in such manner that any mark
contemplated by this section would
necessarily be obliterated, destroyed or
permanently concealed
8. An ultimate purchaser, by reason of the
character of such article or by reason of
the circumstances of its importation must
necessarily know the country of origin of
such article even though it is not marked
to indicate its origin
9. Such article was produced more than
twenty years prior to its importation into
the Philippines
10. Such article cannot be marked after
importation except at an expense which is
economically prohibitive, and the failure
to mark the article before importation
was not due to any purpose of the
importer, producer, seller or shipper to
avoid compliance with this section. (Sec.
303, TCC)

Safeguard Measures

Q: What are safeguard measures?

A: Safeguard measures are defined as emergency"

actions with respect to increased imports of
particular products, where such imports have
caused or threaten to cause serious injury to the
importing Member's domestic industry. (Article XIX
of GATT 1994)

It is a measure provided by the State to protect

domestic industries and producers from increased
imports which cause or threaten to cause serious
injury to those domestic industries and producers.
(Sec. 2, R.A. 8800)

Q: Who has the authority to impose safeguard

measures?

A: Upon, and only upon, positive final

determination by the Tariff Commission, the
following shall apply a general safeguard measure:

1. Secretary of Agriculture
If the article in
question is an agricultural product;
2. Secretary of Trade and Industry If the
article is non-agricultural product. (Sec. 5,
Ibid.)

Q: Are the factual findings of the Tariff

Commission on the existence or non-existence of
conditions warranting the imposition of general

safeguard measures binding upon the DTI

Secretary?

A: Yes. The positive final determination by the Tariff

Commission operates as an indispensable requisite
to the imposition of the safeguard measure.
Congress in enacting the SMA and prescribing the
roles to be played therein by the Tariff Commission
and the DTI Secretary did not envision that the
President, or his/her alter ego, could exercise
supervisory powers over the Tariff Commission- the
Tariff Commission does not fall under the
administrative supervision of the DTI. (Southern
Cross Cement Corp. v. Cement Manufacturers Assoc.
of the Phils., G.R. No. 158540, Aug. 3, 2005)

CUSTOMS VALUATION

Q: What is customs valuation?

A: Customs valuation is a procedure for

determining the customs value of imported goods.
If the rate of duty is ad valorem, the customs value
is essential to determine the duty to be paid on an
imported good.

Q: How are customs duties computed?

A: The importer/broker shall compute the duties

and taxes using the appropriate valuation method.
There are two processes involved in the
computation of customs duties on imported
articles:
1. Classification of the articles into their
appropriate tariff heading;
2. Determination of the valuation if the rate
is ad valorem or mixed.

Note: The basis of dutiable value is the transaction

value. Only when it cannot be determined that the

other methods may be used, in the following order.

Q: State and explain the basis of dutiable value of

an imported article subject to an ad valorem tax
under the TCC?

A: The basis of dutiable value of an imported article

subject to an ad valorem tax under the TCC is its
transaction value which shall be the price actually
paid or payable for the goods when sold for export
to the Philippines, adjusted by adding certain cost
elements to the extent that they are incurred by
the buyer but are not included in the price actually
paid or payable for the imported goods. (Sec. 201,
TCC). If such value could not be determined, then
the following values are to be used respectively;
transaction value of identical goods, transaction
value of similar goods, computed value and fallback
value. (2005 Bar Question)

Q: For customs valuation, when are goods

identical and when are they similar?

A:
1. Identical goods
goods which are the
same in all respects, including physical
characteristics, quality and reputation.
Minor differences in appearances shall
not preclude goods otherwise conforming
to the definition from being regarded as
identical.
2. Similar goods goods which although not
alike in all respects have like
characteristics and like component
materials which enable them to perform
the same functions and to be
commercially interchangeable. The
quality of the goods, their reputation and
the existence of a trademark shall be
among the factors to be considered in
determining whether goods are similar.

Q: What are the methods in assessing the dutiable

value of an imported article subject to an ad
valorem rate of duty?

A:
1. TRANSACTION VALUE
the dutiable value
of an imported article subject to an ad
valorem rate of duty shall be the transaction
value, which shall be the PRICE ACTUALLY
PAID OR PAYABLE FOR THE GOODS when
sold for export to the Philippines adjusted
by adding:
a. The following to the extent incurred
by the buyer but not included in
price actually paid:
i. Commission and brokerage
fees
ii. Cost of container
iii. Cost of packing
iv. Value of the goods, materials
and services used in the
production or in connection
with the production and sale
of the imported good
v. Amount of royalties and
license fees related to the
goods being valued that the
buyer must pay
b. Value of any of the proceeds of any
subsequent resale, disposal or use of
the imported goods that accrues
directly or indirectly to the seller

c. Transport cost of import goods from

port of exportation to port of entry
in the Philippines
d. Unloading and handling charges
associated with transport of
imported goods
e. Cost of insurance

2. TRANSACTION VALUE OF IDENTICAL

GOODS
the dutiable value shall be the
transaction value of identical goods SOLD
FOR EXPORT TO THE PHILIPPINES AND
EXPORTED AT OR ABOUT THE SAME TIME
AS THE GOODS BEING VALUED.

3. TRANSACTION VALUE OF SIMILAR GOODS

where the dutiable value cannot be
determined under the preceding method,
the dutiable value shall be the transaction
value of similar goods SOLD FOR EXPORT TO
THE PHILIPPINES AND EXPORTED AT OR
ABOUT THE SAME TIME AS THE GOODS
BEING VALUED.

4. DEDUCTIVE VALUE the dutiable value of

the imported goods under this method shall
be the deductive value which shall be based
on the UNIT PRICE AT WHICH THE
IMPORTED GOODS OR IDENTICAL OR
SIMILAR IMPORTED GOODS ARE SOLD IN
THE PHILIPPINES, in the same condition as
when imported, in the greatest aggregate
quantity, at or about the time of the
importation of the goods being valued, to
persons not related to the persons from
whom they buy such goods, subject to
deductions:
a. Either the commissions usually
paid or agreed to be paid or the
additions usually made for profit
and general expenses in
connection with sales.
b. The usual costs of transport and
insurance and associated costs;
c. The costs and charges;
d. Customs duties and other national
taxes

5. COMPUTED VALUE
the dutiable value of
this method shall be the computed value
which shall be the SUM of:
a. The COST OR THE VALUE OF
MATERIALS and fabrication of
other processing employed in
producing the imported goods;
b. The AMOUNT FOR PROFIT AND
GENERAL EXPENSES equal to that
usually reflected in the sale of
goods of the same class or kind as
the goods being valued which are
made by producers in the country
of exportation for export to the
Philippines;
c. The FREIGHT, INSURANCE FEES
AND OTHER TRANSPORTATION
EXPENSES for the importation of
the goods;
d. ANY ASSIST, if its value is not
included under paragraph 1
hereof; and
e. The COST OF CONTAINERS AND
PACKING, if their values are not
included under paragraph 1
hereof.

Note: At the request of the importer, the

order of application of Deductive Value and
Computed Value may be reversed.
However, if the Commissioner of Customs
deems that he will experience real
difficulties in determining the dutiable value
using Computed Value, he may refuse such
request

6. FALLBACK VALUE if the dutiable value

cannot be determined under the preceding
methods described above, it shall be
determined by using REASONABLE MEANS
consistent with the principles and general
provisions of the Agreement on Tariffs and
Trade of 1994 and of Article VII of GATT of
1994 and on the basis of data available in
the country of importation.

Note: If the importer so requests, he shall be informed

in writing of the dutiable value determined under

Fallback Value and the method used to determine
such value.

Q: What are the PROHIBITED METHODS OF

VALUATION?

A: No customs value shall be determined under the

provisions of this Article on the basis of:
1. the selling price in the country of
importation of goods produced in such
country;
2. a system which provides for the
acceptance for customs purposes of the
higher of two alternative values;
3. the price of goods on the domestic
market of the country of exportation;
4. the cost of production other than
computed values which have been
determined for identical or similar goods
in accordance with the provisions of
Article 6;

5. the price of the goods for export to a

country other than the country of
importation;
6. minimum customs values; or
7. arbitrary or fictitious values

Preparation of Import Entry

Q: What is import entry?

A: It is a declaration to the Bureau of Customs

showing the description, value, tariff classification
and other particulars of the imported article to
enable the customs authorities to determine the
correct customs duties and internal revenue taxes
due on the importation.

Q: When is import entry required?

A:
GR: All imported articles shall be subject to
formal or informal entry.

XPN: Except containers for re-export subject to

conditionally free-importation. (Sec. 1302, TCC
as amended by RA 9135)

Q: What are the kinds of import entry and what

articles do they cover?

A:
1. Informal entry
a. Articles of a commercial nature
intended for sale, barter or hire, the
dutiable value of which is P2,000 or
less
b. Personal household effects or
articles, not in commercial quantity,

imported in passenger s baggage,

mail or otherwise, for personal use

2. Formal entry
The TCC does not provide
for a listing of articles that are required
to be cleared on a formal entry. The
Customs Commissioner may, upon
instruction for the protection of the
Finance Secretary, for the protection of
domestic industry, require articles
regardless of value to be cleared by a
formal entry.

Q: Who are the persons authorized to make

import entry?

A:
1. The importer, being the holder of a bill of
lading
2. A duty licensed customs broker acting
under authority from a holder of a bill;
3. A person duly empowered to act as agent
or attorney-in-fact for each holder of the
bill of lading. (Sec. 1301, TCC as amended
by R.A. 9135)

Q: What is a consumption entry?

A: It is a government form accomplished by an

importer or his representative, which is ultimately
submitted to the proper office of the Bureau of
Customs as a basis for inspection of the
importations of an importer and for the
computation of the correct customs duties and
internal revenue taxes due on importation.

Q: When is the period for filing import entry?

A: Imported articles must be entered in the

customhouse at the port of entry within 30 days,

which shall not be extendible, from the discharge of

the last package from the vessel or aircraft. (Sec.
1301, TCC as amended by R.A. 9135)

Q: When is the

discharge of the last package ?

A: It is when the unloading of the shipment from

the carrier is completed. In case of transshipment,
the discharge of the last package from the domestic
carrier at the port of final destination.

Examination, Classification and

Appraisal of Imported Articles

Q: What are the duties of the customs officer

tasked to examine, classify, and appraise imported
articles?

A:
1. Determine whether the packages
designated for examination and their
contents are in accordance with the
declaration in the entry, invoice and other
pertinent documents
2. Make a return in such a manner to
indicate whether the articles have been
truly and correctly declared in the entry
as regard their quantity, measurement,
weight and tariff classification and not
imported contrary to law
3. Submit sample to the laboratory for
analysis when feasible to do so and when
such analysis is necessary for the proper
classification, appraisal, and/or admission
into the Philippines of imported articles

4. Determine the unit of quantity in which

they are usually bought and sold and
appraise the imported articles in
accordance with Section 201 of the TCC.
(Sec. 1403, TCC)

Note: At present, X-ray scanning is used as an

alternative to physical examination. However, physical
examination shall be conducted to determine the
correct tariff heading. This is the present mode of
examination of imported articles.

Q: Is the classification and appraisal by the

Collector of Customs final?

A:
GR: Appraisal, classification return as finally
passed upon and approved or modified by the
Collector shall not be altered or modified in any
manner.

XPNS: Readjustment may be made:

1. Within one year after payment of the
duties, upon statement of error in
conformity with Sec. 1707 of the TCC,
approved by the Collector. Sec. 1707
provides for the correction of manifest
clerical errors made in an invoice or entry,
errors in return of weight, measure and
gauge, when duly certified to, under
penalties of falsification or perjury, by the
surveyor or examining official (when
there are such officials at the port), and
errors in the distribution of charges on
invoices not involving any question of law
and certified to, under penalties of
falsification or perjury, by the examining
official
2. Within fifteen days after such payment
upon request for reappraisal and/or
reclassification addressed to the
Commissioner by the Collector, if the
appraisal and/or classification is deemed
to be low.
3. Upon request for reappraisal and/or
reclassification, in the form of a timely
protest addressed to the Collector by the
interested party if the latter should be

dissatisfied with the appraisal or return.

4. Upon demand by the Commissioner of
Customs after the completion of
compliance audit pursuant to the
provisions of this Tariff and Customs
Code." (Sec. 1407, TCC as amended by
R.A. 9135)

Preparation of Discrepancy Report

Q: When is a discrepancy report prepared?

A: If the Collector of Customs believes that

additional customs duties, taxes, fees and other
charges are due on the importation, a discrepancy
report is prepared showing the amounts due from
the importer.

Q: What if the importer does not pay the

additional charges?

A: The imported articles would not be released

from customs custody.

Customs Protest

Q: In case there is a dispute between the importer

and the Collector as to the correct determination
of duties, taxes and other charges, what is
required from the importer?

A: The law requires the importer to file a protest at

the time when payment of the amount claimed to
be due the government is made or within 15 days
thereafter.

Q: What is the effect of the failure of the importer

to file a written protest on the assessment of the
Collector?

A: If the importer fails to file a formal protest, he

could not obtain a refund of the duties and other
charges claimed to have been erroneously paid by
him.

Payment of Duties and Taxes

Q: When are custom duties computed and paid?

A: The Philippines adopts the self-assessment

system. Thus, it is the importer which initially
determines the customs duties and other charges
due from him and pays the same. However, his
computation and payment is subject to the review
of the taxing authorities.

Delivery of the Imported Article

Q: To whom shall the imported articles be

delivered?

A:
1. Delivery of articles to holder of bill of
lading
A Collector shall make a delivery
of a shipment, upon the surrender of the
bill of lading, to person who by the terms
thereof appears to be the consignee or
lawful holder of the bill. He shall not be
liable on account of any defect in the bill
or irregularity in its negotiation, unless he
has notice of the same. (Sec. 1501, TCC)

2. Delivery of articles without production of

bill of lading
No Collector shall deliver
imported articles to any person without
the surrender by such person of the bill
of lading covering said article, except on
written order of the carrier or agent of
the importing vessel or aircraft. However,
the Collector for customs purposes may
require the production of an exact copy
of the bill of lading where delivery of
articles is made against such written
order of the carrier or agent of the
importing vessel or aircraft. (Sec. 1502,
TCC)

Q: When may the Collector withhold the delivery

of an imported article?

A: When the Collector is duly notified in writing of

a lien for freight, lighterage or general average
upon any imported articles in his custody, he shall
withhold the delivery of the same until he is
satisfied that the claim has been paid or secured.
(Sec. 1505, TCC)

Q: When is the Collector authorized to suspend

the delivery or release of imported articles?

A: Whenever any importer has an outstanding and

demandable account with the Bureau of Customs,
the Collector shall hold the delivery of any article
imported or consigned to such importer unless
subsequently authorized by the Commissioner of
Customs, and upon notice as in seizure cases, he
may sell such importation or any portion thereof to
cover the outstanding account of such importer. At
any time prior to the sale, the delinquent importer
may settle his obligations with the Bureau of
Customs, in which case the aforesaid articles may
be delivered upon payment of the corresponding
duties and taxes and compliance with all other
legal requirements. (Sec. 1508, TCC)
However, where the importer is the government,
the authority to hold the delivery or release of its
imported article does not find application. (Ibid.)

Q: Is the Collector personally liable for misdelivery

of cargoes?

A: Yes. As a rule, a Collector is not personally liable

with respect to his ruling in custom cases.
However, he may be held personally liable:
1. In case of misdelivery of imported
articles; or
2. When he decided with grave abuse of
authority. (Sec. 3511, TCC)

Q: Is the Collector still liable for misdelivery even

if he has no knowledge of such?

A: Yes. He is still liable even if the misdelivery was

made by his subordinate and he had no knowledge
of such. This is to protect the shipper, consignee or
the person interested in the cargo. (Collector of
Customs of Manila v. IAC, et. al., 137 SCRA 4)

Q: What is the Compliance Audit under the Tariff

and Customs Code?

A: The Bureau of Customs shall examine, inspect

and verify the books, records and documents

necessary or relevant for the purpose of collecting

the proper duties and taxes.
Q: What is required from the importer for
purposes of compliance audit?

A: All importers are required to keep at their

principal place of business, in the manner
prescribed by regulations to be issued by the
Commissioner of Customs and for a period of three
(3) years from the date of importation, all the
records of their importations and/or books of
accounts, business and computer systems and all
customs commercial data including payment
records relevant for theverification of the accuracy
of the transaction value declared by the
importers/customs brokers on the import entry.
(Sec. 3514, TCC; Sec. 8, R.A. 9135)

Q: What are the effects of denial by the importer

of access to its records?

A: The Bureau of Customs may, in case of

disobedience:
1. Invoke the aid of the proper regional trial
court within whose jurisdiction the
matter falls. The court may punish
contumacy or refusal as contempt;
2. File a criminal case imposed by the TCC;

3. Subject the importer/broker

administrative sanctions that the Bureau
of Customs may impose against
contumacious importers under existing
laws and regulations including the
authority to hold delivery or release of
their imported articles.

Note: The fact that the importer/broker denies the

authorized customs officer full and free access to
importation records during the conduct of a postentry audit shall create a presumption of inaccuracy in
the transaction value declared for their imported
goods and constitutes grounds for the Bureau of
Customs to conduct a re-assessment of such goods.

Q: What is the effect of the failure to pay correct

duties and taxes after post-entry audit and
investigation?

A: Any person who, after being subjected to postentry audit and examination and is found to have
incurred deficiencies in duties and taxes paid for
imported goods, shall be penalized according to
the three (3) degrees of culpability subject to any
mitigating, aggravating or extraordinary factors
that clearly established by the available evidence.
(Sec. 3611, TCC as amended by R.A 9135)

Q: What are the three degrees of culpability?

A:
1. Negligence
When the deficiency results
from an offender s failure, through an act
or acts of omission or commission, to
exercise reasonable care and
competence to ensure that a statement
made is correct.
2. Gross Negligence
When a deficiency
results from an act or acts of omission or
commission done with actual knowledge
or wanton disregard for the relevant facts
and with indifference to or disregard for
the offender s obligation under the
statute.
3. Fraud When the material false
statement or act in connection with the

transaction was committed or omitted

knowingly, voluntarily and intentionally,
as established by clear and convincing
evidence. (Ibid.)

Liquidation

Q: What is meant by liquidation?

A: Liquidation is the final computation and

ascertainment by the Collector of Customs of the
duties due on imported merchandise based on
official reports as to the quantity, character and
value thereof, and the Collector of Customs' own
finding as to the applicable rate of duty. It is akin to
an assessment of internal revenue taxes under the
NIRC where the tax liability of the taxpayer is
definitely determined.

A liquidation is considered to have been made

when the entry is officially stamped liquidated.
(Pilipinas Shell Petroleum Corporation v. Republic of
the Philippines, etc., G. R. No. 161953, Mar. 6,
2008)

Q: When is liquidation deemed final?

A: An assessment or liquidation by the Bureau of

Customs attains finality and conclusiveness three
(3) years from the date of the final payment of
duties except when:
1. There was fraud;

2. There is a pending protest; or

3. The liquidation of import entry was
merely tentative. (Sec. 1603 TCC, as
amended by R.A. 9135)

Q: When is there tentative liquidation?

A: If to determine the exact amount due under the

law in part some future action is required, the
liquidation shall be deemed to be tentative as to
the item or items affected and shall to that extent
be subject to future and final readjustment and
settlement within a six (6) months from date of
tentative liquidation. (Sec. 1602, TCC)

PROCEEDINGS BEFORE THE BOC

Q: What are the proceedings before the Bureau of

Customs?

A:
1. Customs protest; and
2. Customs seizure and forfeiture.

Customs Protest

Q: What are customs protest cases?

A: These are cases which deal solely with liability

for customs duties, taxes, fees and other charges.

Q: What does a customs protest involve?

A: A customs protest, which is a tax protest case

under the TCC, involves a protest of the liquidation
of import entries.

Q: When should protest be filed?

A: Protest is required to be filed only in case the

liability of the taxpayer for duties, taxes, fees and
other charges is determined and the taxpayer
disputes said liability.

Q: When is protest not required to be filed?

A: When there is no dispute as to the correctness of

the duties and taxes paid but the claim for the
refund arises by reason of the happening of
supervening events such as when the raw material
imported is utilized in the production of finished
products subsequently reported and a duty
drawback is claimed.

Q: What are the requirements for protest?

A: SamPoWL-15G
1. In Writing;
2. Points out the particular decision or ruling
by the Collector of Customs to which
exception is taken or objection is made;
3. States the Grounds relied upon for relief;

4. Limited to the subject matter of a single

adjustment;
5. Filed when the amount claimed is paid or
within 15 days after payment;
6. Sample of goods under protest must be
furnished by the protestant, when
required.

Q: What is the procedure on customs protest

cases?

A:
1. Collector (within his jurisdiction) shall
cause the imported goods to be entered
at the customhouse;
2. Collector shall assess, liquidate and
collect the duties thereon or detain the
said goods, in case of non-payment;
3. The party adversely affected (protestant)
may file a written protest on his assessed
liability to the Collector of Custom within
15 days after paying the liquidated
amount (payment under protest).
4. Collector shall conduct a hearing within
15 days from receipt of the duly
presented protest.
5. Decision shall be made by the Collector
within 30 days upon termination of the
hearing. (Sec. 2312, TCC)

Q: What is the remedy if the decision is adverse to

the protestant?

A:
1. Appeal with the Commissioner of
Customs within 15 days from notice;
2. Then, appeal with CTA Division within 30
days from receipt of ruling;
3. Then, file a motion for reconsideration or
new trial within 15 days from notice;
4. If resolution is adverse to the taxpayer,
file a petition for review with the CTA en
banc;
5. Then, petition for review on certiorari
with the SC within 15 days from notice.

Q: What if the decision of the Collector or the

Commissioner is adverse to the Government?

A:
1. Automatic reviewby the Commissioner - If
the Collector renders a decision adverse
to the Government (the importer s
protest is granted).
2. Automatic review by the Secretary of
Finance - If the decision of the
Commissioner of Customs is adverse to
the Government.

Q: Whenever the decision of the Collector of

Customs is adverse to the government, it is
automatically elevated to the Commissioner for
review and, if it is affirmed by him, it is
automatically elevated to the Secretary of Finance
for review. What is the basis of the automatic
review procedure in the Bureau of Customs?
Explain your answer.

A: Automatic review is intended to protect the

interest of the Government in the collection of
taxes and customs duties in seizure and protest
cases. Without such automatic review, neither the
Commissioner of Customs nor the Secretary of
Finance would know about the decision laid down
by the Collector favoring the taxpayer. The power
to decide seizure and protest cases may be abused
if no checks are instituted. Automatic review is
necessary because nobody is expected to appeal

the decision of the Collector which is favorable to

the taxpayer and adverse to the Government. This
is the reason why whenever the decision of the
Collector is adverse to the Government, the said
decision is automatically elevated to the
Commissioner for review; and if such decision is
affirmed by the Commissioner, the same shall be
automatically elevated to and be finally reviewed
by the Secretary of Finance. (Yaokasin v.
Commissioner of Customs, G.R. No. 84111, Dec. 22,
1989)(2002 Bar Question)

Customs Seizure and Forfeiture

Q: What is the nature of customs seizure and

forfeiture case?

A: They are administrative and civil in nature and

are directed against the res or imported articles
and entail the determination of the legality of the
importation. These are actions in rem. Thus, it is of
no defense that the owner of the vessel sought to
be forfeited had no actual knowledge that his
property was used illegally. The absence or lack of
actual knowledge of such use is a defense personal
to the owner himself, which cannot in any way
absolve the vessel from the liability of forfeiture.
(Commissioner of Customs v. Manila Star Ferry,
Inc., G.R. Nos. 31776-78, Oct. 21, 1993)

SMUGGLING

Q: What is smuggling?

A: Any act of a person who shall:

1. fraudulently import or bring into the
Philippines, any article, contrary to law; or
2. assist in so doing; or
3. receive, conceal, buy, sell or in any
manner facilitate the transportation,

concealment, or sale of such article after

importation, knowing the same to have
been imported contrary to law. (Sec.
3601, TCC)

Note: The Philippines is divided into various ports of

entry. Entry in any place other than those ports will be
considered smuggling.

Q: What are the elements of smuggling or illegal

importation?

A:
1. That the merchandise must have been
fraudulently or knowingly imported
contrary to law;
2. That the defendant, if he is not the
importer himself, must have received,
concealed, bought, sold or in any manner
facilitated the transportation,
concealment or sale of the merchandise;
and
3. That the defendant must be shown to
have knowledge that the merchandise has
been illegally imported.

Q: An information was filed against Jardeleza in

violation of the TCC for bringing 20.1 kilograms of
assorted gold jewelry with an estimated value of
P7,562,231.50. Such was effected by hiding said
jewelry inside a hanger bag and, by not declaring it
in the Customs Declaration form and, by verbally
denying that she is carrying said items by
answering no when asked by Bureau of Customs
if she has anything to declare prior to the actual
inspection of her luggage. The accused denied the
allegations against her.

Is the accused guilty of smuggling the jewelries?

A: Yes. A person arriving in the Philippines with

baggage containing dutiable articles is bound to
declare the same in all respects. Adequate
reporting of dutiable merchandise being brought
into the country is absolutely necessary to the

enforcement of customs laws, and failure to comply

with those requisites is as condemnable as failure
to pay customs fees. Any administrative penalty
imposed on the person arriving in the Philippines
with undeclared dutiable articles is separate from
and independent of criminal liability for smuggling
under Sec. 3601 of the TCC and for violation of
other provisions in the TCC.

The phrase contrary to law in Sec. 3601 of the

TCC qualifies the phrases imports or brings into
the Philippines and assists in so doing, and not
the word article . The word law includes
regulations having the force and effect of law,
meaning substantive or legislative type rules as
opposed to general statements of policy or rules of
agency, organization, procedures or positions.
(Jardeleza v. People of the Philippines,G.R. No.
165265, Feb. 06, 2006)

Q: What needs to be proved before a person may

be found guilty of smuggling?

A:
GR: Mere possession of the articles in question.

XPN: If defendant could explain that his

possession is lawful.

Q: Is mere possession of the alleged smuggled

goods enough evidence for the conviction of
smuggling?

A: Yes. After importation, the act of facilitating the

transportation, concealment or sale of the
unlawfully imported article must be with the
knowledge that the article was smuggled. However,
if upon trial the defendant is found to have been in
possession of such article, this shall be sufficient to
authorize conviction unless the defendant explains
his possession to the satisfaction of the court.The
receipt, concealment, sale, purchase or the
facilitation thereof after the unlawful importation
with the knowledge that the textile is smuggled
becomes punishable under Section 3601 of the
Code. (Rodriguez v. CA, G.R. No. 115218, Sept. 18,
1995)

Q: What are contrabands?

A: These are articles of prohibited importation or

exportation. (Sec. 3519, TCC)

Q: When are imported goods not considered as

contrabands?

A: Imported goods must be entered into a

customhouse at their port of entry, otherwise they
shall be considered as contraband and the importer
is liable for smuggling. (Sec. 101, TCC)

Q: What is port of entry?

A: It is a domestic port open to both foreign and

coastwise trade including airport of entry . (Sec.
3514, TCC). All articles imported into the Philippines
whether subject to duty or not shall be entered
through a customs house at a port of entry.

Q: What are the things subject to confiscation in

smuggling cases?

A:
GR: Anything that was used for smuggling is
subject to confiscation, like the vessel, plane,
etc. (Llamado v. Commissioner of Customs, G.R.
No. L-28809, May 16, 1983).

XPN: Common carriers which are not privately

chartered cannot be confiscated.

Note: Common carriers are generally not subject to

forfeiture except if the owner has knowledge of and
consented to its use in smuggling. Lack of personal
knowledge of the owner or carrier does not constitute
a valid defense in forfeiture cases.

Q: What properties are not subject to forfeiture in

the absence of prima facie evidence?

A: The forfeiture of a vehicle, vessel or aircraft shall

not be effected if it is established that the owner
thereof or his agent in charge of the means of
conveyance used has no knowledge of or
participation in an unlawful act.

Q: When is there prima facie presumption of

knowledge of or participation in the unlawful act?

A:
1. If the conveyance has been used for
smuggling at least twice before.
2. If the owner is not in the business for
which the conveyance is generally used.
3. If the owner is financially not in the
position to own such conveyance.

Q: In smuggling a shipment of garlic, the smugglers

used an eight-wheeler truck which they hired for
the purpose of taking out the shipment from the
customs zone. Danny, the truck owner, did not

have a certificate of public convenience to operate

his trucking business. Danny did not know that the
shipment of garlic was illegally imported. Can the
Collector of Customs of the port seize and forfeit
the truck as an instrument in the smuggling?

A: Yes, since the same was used unlawfully in the

importation of smuggled articles. The mere carrying
of such articles on board the truck (in commercial
quantities) shall subject the truck to forfeiture,
since it was not being used as a duly authorized
common carrier, which was chartered or leased as
such. (Sec. 2530 [a], TCC)

Moreover, although forfeiture of the vehicle will

not be effected if it is established that the owner
thereof had no knowledge of or participation in the
unlawful act, there arises a prima facie presumption
or knowledge or participation if the owner is not in
the business for which the conveyance is generally
used. Thus, not having a certificate of public
convenience to operate a trucking business, he is
legally deemed not to have been engaged in the
trucking business. (Sec. 2531, TCC) (1994 Bar
Question)

Q: What are the requirements for customs

forfeiture of imported goods?

A:
1. The wrongful making by the owner,
importer, exporter or consignee of any
declaration or affidavit, or the wrongful
making or delivery by the same persons of

any invoice, letter or paper - all touching

on the importation or exportation of
merchandise.;
2. That such declaration, affidavit, invoice,
letter or paper is false; and
3. An intention on the part of the
importer/consignee to evade the
payment of the duties due. (Republic, etc.,
v. CTA, et al., G.R. No. 139050, Oct. 2,
2001)

Q: On January 30, 1972, the vessel S/S "Pacific

Hawk" arrived at the Port of Manila carrying,
among others, 80 bales of screen net consigned to
Bagong Buhay Trading. Since the customs
examiner found the subject shipment reflective of
the declaration, Bagong Buhay paid the duties and
taxes due in the amount of P11,350.00 which was
paid through the Bank of Asia thereafter, the
customs appraiser made a return of duty. The
Collector of Customs determined the subject
shipment classifiable at 100% ad valorem. Thus,
Bagong Buhay Trading was assessed P272, 600.00
as duties and taxes due on the shipment in
question. Since the shipment was misdeclared as
to quantity and value, the Collector of Customs
forfeited the subject shipment in favor of the
government.

Is the shipment in question subject to forfeiture?

A: Although it cannot be denied that Bagong Buhay

caused to be prepared through its customs broker a
false import entry or declaration, it cannot be
charged with the wrongful making thereof because
such entry or declaration merely restated faithfully
the data found in the corresponding certificate of
origin,certificate of manager of the shipper, the
packing lists and the bill of ladingwhich were all
prepared by its suppliers abroad. If at all, the
wrongful making or falsity of the documents abovementioned can only be attributed to Bagong
Buhay's foreign suppliers or shippers. With regard
to the second requirement on falsity, it bears
mentioning that the evidence on record,
specifically, the decisions of the Collector of
Customs and the Commissioner of Customs, do not
reveal that the importer or consignee, Bagong
Buhay Trading had any knowledge of any falsity on
the subject importation. (Farolan, Jr. v. CTA, G.R.
No. 42204, Jan. 21, 1993)

Q: What are the types of valuation frauds?

A:
1. Undervaluation
reporting lower values
than the actual transaction value
2. Overvaluation reporting values higher
than the transaction value
3. False invoice description through
reporting lower qualities in the invoice not
identifying branded items as such
4. False country of origin

Q: When can forfeiture be effected?

A:
1. Forfeiture shall be effected only when
and while the article is in the custody or
within the jurisdiction of the customs
authority;
2. In the hands or subject to the control of
importer/exporter, original owner,
consignee, agent, or other person
effecting the importation entry or
exportation;
3. In the hands or subject to the control of
some person who shall receive, conceal,
buy, sell or transport or aid in such acts
with knowledge.

Q: May seizure be effected even outside the

territorial limits of the Philippines (doctrine of hot
pursuit)?

A: Yes. A vessel loaded with contraband while in

the high seas headed towards Tawi-tawi was
considered to have been lawfully seized. The
power of a nation to secure itself from injury may
be exercised beyond the territorial limits. (Asaali,
et al. v. Commissioner of Customs, G.R. No. L24170, Feb. 28, 1969)

Q: What are the requisites of the Doctrine of Hot

Pursuit in TCC?

A:
1. Over vessels:
a. Act is done in Philippines waters;
b. Act constitutes a violation of TCC;
c. Pursuit of such vessel began within
the jurisdictional waters:
i. Which may continue beyond
the maritime zone;
ii. And the vessel may be seized
on the high seas.

2. Over imported articles:

a. There is violation of TCC;
b. As a consequence, they may be
pursued in their transportation in
the Philippines by land, water or air;
c. Such jurisdiction over them at any
place therein as may be necessary

for the due enforcement of the law.

(Sec 603, TCC)

Q: State the Doctrine of Primary Jurisdiction of the

BOC (Doctrine of Exclusive Customs Jurisdiction
over customs cases.)

A: The BOC has exclusive administrative jurisdiction

to conduct searches, seizures and forfeitures of
contraband without the interference from the
courts. The BOC could conduct searches and
seizures without need of judicial warrant except if
search is to be conducted in a dwelling place.

Q: What is the rationale behind the doctrine of

exclusive customs jurisdiction?

A: The rule that the RTC has no power of review

over such proceedings is anchored upon:
1. The policy of placing no unnecessary
hindrance on the government s drive, not
only to prevent smuggling and other
frauds upon Customs; but more
importantly,
2. To render effective and efficient the
collection of import and export duties
due the State, which enables the
government to carry out the functions it
has been instituted to perform.

Q: Sometime in September 1990, a shipment of

150 packages of imported goods and personal
effects arrived and was unloaded at the Port of
Manila. After the amount of P15,887.00 was paid
by the consignee as custom duties, international
revenue taxes, fees and other charges, the
packages were released from Manila Customs
House. As the packages were being transported

from the customs area to their destination, the

truck carrying them was intercepted at TM Kalaw
St, Ermita, Manila by WPD-PNP personnel. In the
formal communication, WPD-PNP informed the
Collector of Customs that the packages were
released from the customs zone without proper
appraisal to the damage of the government and
requested for the issuance of the necessary
warrant of seizure. Seizure proceedings was then
instituted and the Collector of Customs issued a
warrant of seizure and detention. During the
process and while the goods were being removed
by the customs agents from the bodega where
they were stored, the consignee filed a petition
with the RTC of Manila asking that the Collector of
Customs and all his agents be restrained from
enforcing the warrant aforesaid and from
proceeding with the trial of seizure proceeding
and the said warrant be declared void since the
Collector no longer has jurisdiction to issue the
same considering that the customs duties and the
taxes had already been paid and the goods had
left the control and jurisdiction of the Bureau of
Customs.

1. Did the Collector of Customs have jurisdiction

to issue the warrant of seizure and
detention?
2. Did the payment of customs duties, taxes,
etc. render illegal and improper the issuance
of said warrant?
3. Has the Regional Trial Court jurisdiction to
hear and decide the civil case?

A:
1. Yes because the importation has not yet
ended. This is so because the importation
ends upon the issuance of a valid permit
withdrawal. The fact that the goods were
not properly appraised negates the
issuance of a proper permit for
withdrawal.
2. No. Until the correct duties and taxes
have been paid and the proper permits
then customs authorities have the
authority to issue warrants for seizure
and detention.
3. No, for the following reasons:
a. There should be no
unnecessary hindrance on the
government s drive to prevent
smuggling and other frauds
upon the Customs.
b. To render effective and

efficient the collection of

import and export duties due
to the State which enables the
government to carry out the
functions it has been instituted
to perform.
c. The doctrine of primary
jurisdiction. (1991 Bar
Question)

Q: On January 7, 1989, the vessel M/V Star Ace

coming from Singapore loaded with cargo, entered
the Port of San Fernando, La Union for needed
repairs. When the Bureau of Customs later
became suspicious that the vessel s real purpose in
docking was to smuggle cargo into the country,
seizure proceedings were instituted and
subsequently two Warrants of Seizure and
Detention were issued for the vessel and its cargo.

Mr. X does not own the vessel or any of its cargo

but claimed a preferred maritime lien. He then
brought several cases in the RTC to enforce his
lien. Would these suits prosper ?

A: No. The Bureau of Customs having first obtained

possession of the vessel and its goods has obtained
jurisdiction to the exclusion of the trial courts.

When Mr. X has impleaded the vessel as a

defendant to enforce his alleged maritime lien, in
the RTC, he brought an action in rem under the
Code of Commerce under which the vessel may be
attached and sold.

However, the basic operative fact is the actual or

constructive possession of the res by the tribunal
empowered by law to conduct the proceedings.
This means that to acquire jurisdiction over the
vessel, the trial court must have obtained either
actual or constructive possession over it. Neither
was accomplished by the RTC as the vessel was
already in the possession of the Bureau of Customs.
(Commissioner of Customs v. CA, et al., G. R. Nos.
111202-05, Jan. 31, 2006)

Q: Is a judicial search warrant necessary in case of

customs search and seizures?

A: No, it is one of the exceptions to the judicial

warrant requirement under the Constitution. Under
the Tariff and Customs Code, a search, seizure and
arrest may be made even without a warrant for
purposes of enforcing customs and tariff laws.
(Rieta v. People, 436 SCRA 273, August 12, 2004)

Q: Who are the persons having police authority to

enforce tariff and customs laws?

A:
1. Officials of the Bureau, district collectors,
police officers, agents, inspectors and
guests of the Bureau;
2. Officers of the Philippine Navy and other
members of the AFP and national law
enforcement agencies, when authorized
by the Commissioner of Customs;
3. Officials of the BIR in cases falling within
the regular performance of their duties,
when payment of internal revenue taxes
are involved;

4. Officers generally empowered by law to

effect arrests and execute processes of
courts when acting under the direction of
the Collector. (Sec. 2203, TCC)

Note: All persons conferred with powers to enforce

tariff and customs laws may exercise the same at any
place within the jurisdiction of the Bureau of Customs.

Q: How may customs officers effect seizure and

arrest?

A:
1. May seize any vessel, aircraft, cargo,
article, animal or other movable property
when the same is subject to forfeiture or
liable for any time as imposed under tariff
and customs laws, rules & regulations;
2. May exercise such powers only in
conformity with the laws and provisions
of the TCC.

Q: On the basis of a warrant of seizure and

detention issued by the Collector of Customs for
the purpose of enforcing the Tariff and Customs
Laws, assorted brands of cigarettes said to have
been illegally imported into the Philippines were
seized from a store where they were openly
offered for sale. Dissatisfied with the decision
rendered after hearing by the Collector of
Customs on the confiscation of the articles, the
importer filed a petition for review with the CTA.
The Collector moved to dismiss the petition for
lack of Jurisdiction.

1. Rule on the motion.

2. Under the same facts, could the importer file
an action in the RTC for replevin on the
ground that the articles are being wrongfully
detained by the Collector of Customs since
the importation was not illegal and therefore
exempt from seizure?

A:
1. Motion granted. The CTA has no jurisdiction
because there is no decision rendered by
the Commissioner of Customs on the
seizure and forfeiture case. The taxpayer
should have appealed the decision
rendered by the Collector within fifteen (15)
days from receipt of the decision to the
Commissioner of Customs. The
Commissioner s adverse decision would
then be the subject of an appeal to the CTA.
2. No. The legislators intended to divest the
RTCs of the jurisdiction to replevin a
property which is a subject of seizure and
forfeiture proceedings for violation of the
Tariff and Customs Code, otherwise, actions
for forfeiture of property for violation of the
Customs laws could easily be undermined
by the simple device of replevin. (De la
Fuente v. De Veyra, et. al, 120 SCRA 455)

There should be no unnecessary hindrance on

the government's drive to prevent smuggling
and other frauds upon the Customs.
Furthermore, the Regional Trial Court do not
have jurisdiction in order to render effective
and efficient the collection of import and

export duties due the State, which enables the

government to carry out the functions It has
been Instituted to perform. (Jao v. CA, G.R.
No. 104604, October 6, 1995) (2000 Bar
Question)

Q: What is required before a warrant of seizure

and detention may be issued?

A: The Collector of Customs upon probable cause

that the articles imported or exported, or are
attempted to be imported or exported are contrary
to the TCC. (Sec. 6, Title III, C.A.O. No. 9-93)

Q: What may be the subject of customs search

and seizure?

A:
1. Land or inclosure or any warehouse,
store or other building, not being a
dwelling house (Sec. 2208, TCC)
2. Dwelling house (Sec. 2209, TCC)
3. Vessels or aircrafts and persons or
articles conveyed therein (Sec. 2210, TCC)
4. Vehicles, beasts and persons (Sec. 2211,
TCC)
5. Persons arriving from foreign countries
(Sec. 2212, TCC).

Note: If the search and seizure is to be conducted in a

dwelling place, then a search warrant should be issued
by the regular courts not the Bureau of Customs.

No warrant is required to be issued by the Bureau of

Customs or the regular courts in search and seizures of
motor vehicles and vessels since it is not practicable to
secure a warrant because vehicles can be quickly
moved out of the locality or jurisdiction in which the
warrabt must be sought.

Burden of proof in seizure or forfeiture is on the

claimant. (Sec. 2535, TCC)

Q: When can a dwelling house be searched?

A: Only upon a warrant issued by a judge of the

regular court and upon a sworn application showing
probable cause and particularly describing the
places to be searched and person or thing to be
seized. (Sec. 2209, TCCP)

Q: MR owns an electronic shop at Mile Long

Shopping Center in Makati. The shop sells various
imported items such as camera, television sets,
video cassette recorders, and similar items. In
February 10, 1990, agents of the Commissioner of
Customs visited the shop and asked that they be
shown the official of Bureau of Customs receipts
evidencing payment of the duties and taxes on all
imported items displayed on the shop. Since MR
could not show any receipt, the custom agents
seized all the imported items displayed on the
shop. Upon a tip by a disgruntled employee of the
MR, the Customs agents preceded to the house of
MR at Sam Lorenzo Village in Makati. More
untaxed imported electronics items were found
there. The customs agents also seized the same.
Discuss the legality of the seizure made by the
customs agents.

A: The seizure conducted at MR s shop is valid

because it is not a dwelling place. The Bureau of
Customs has jurisdiction to effect the seizure
because importation has not yet ended, there being
no showing that there was full payment of customs
duties. The seizure made at his house is invalid
because there was no warrant from a regular court.
(1990 Bar Question)

Q: On January 1, 1996, armed with warrants of

seizure and detention issued by the Bureau of
Customs, members of the customs enforcement
and security services coordinated with the Quezon
City police to search the premises owned by a
certain Mr. Ho along Kalayaan Avenue, Quezon
City, which allegedly contained untaxed vehicles
and parts. While inside the premises, the member
of the customs enforcement and security services
noted articles which were not included in the list
contained in the warrant. Hence, on January 15,
1996, an amended warrant and seizure was issued.
On January 25, 1996, the customs personnel
started hauling the articles pursuant to the

amended warrant. This prompted Mr. Ho to file a

case for injunction and damages with a prayer for
a restraining order before the Regional Trial Court
of Quezon City against the Bureau of Customs on
January 27, 1996. On the same date, the trial court
issued a temporary restraining order. A motion to
dismiss was filed by the Bureau of Customs on the
ground that the RTC has no jurisdiction over the
subject matter of the complaint claiming that it
was the Bureau of Customs that has exclusive
jurisdiction over it. Decide.

A: The motion to dismiss should be granted. Seizure

and forfeiture proceedings are within the exclusive
jurisdiction of the Collector of Customs to the
exclusion of regular Courts. RTCs are devoid of
competence to pass upon the validity or regularity
of seizure and forfeiture proceedings conducted by
the Bureau of Customs and to enjoin or otherwise
interfere with these proceedings (Republic v. CFI of
Manila, G.R. No. 43747, September 2, 1992; Jao v.
CA,G.R. No. 104604, October 6, 1995)

Q: Can goods in the custom s custody pending

payment of customs duties be attached?

A: No. Goods in the custom s custody pending

payment of customs duties are beyond the reach of
attachment. As long as the importation has not
been terminated, the imported goods remain
under the jurisdiction of the Bureau of Customs.
(Viduya v. Berdiago, G.R. No. L-29218, October 29,
1976)

Q: What is a manifest?

A: It is a listing of the passengers or cargoes carried

by a vessel or aircraft, whether engaged in the
coastwise or foreign trade.

Q: When is a manifest required?

A: A manifest in coastwise trade for cargo and

passengers transported from one place or port in
the Philippines to another is required when one or
both of such places is a port of entry (Sec. 906, TC).
Manifests are also required of a vessel from a
foreign port (Sec. 1005, TCC).

Q: Is manifest required only for imported goods?

A: No. Articles subject to seizure do not have to be

imported goods. Manifests are also required for
articles found on vessels or aircraft engaged in
coastwise trade. (Rigor v. Rosales, G.R. No. L33756, October 23, 1982)
Q: Is unmanifested cargo subject to forfeiture?

A: Yes. Unmanifested cargo is subject to forfeiture

whether the act of smuggling is established or not
under the principle of res ipsa loquitur. It is enough
that the cargo was unmanifested and that there
was no showing that payment of duties thereon
had been made for it to be subject to forfeiture.

Q: State the rule in settlement of forfeiture cases.

A:
GR: Settlement of cases by fine or redemption is
generally allowed.

XPNS:
1. The importation is absolutely prohibited;
2. The surrender of the property to the
person offering to redeem would be
contrary to law; or
3. There is fraud. (Sec. 2307, TCC)

Note: At any time prior to the sale, the delinquent

importer may settle his obligations with the Bureau of
Customs, in which case the aforesaid articles may be
delivered upon payment of the corresponding duties
and taxes and compliance with all other legal
requirements (Sec. 1508, TCC)

Q: Discuss briefly the remedies of an importer

during the pendency of seizure proceedings.
A: During the pendency of seizure proceedings the
importer may secure the release of the imported
property for legitimate use by posting a bond in an
amount to be fixed by the Collector, conditioned
for the payment of the appraised value of the
article and/or any fine, expenses and costs which
may be adjudged in the case; provided, that
articles the importation of which is prohibited by
law shall not be released under bond.

The importer may also offer to pay to the collector

a fine imposed by him upon the property to secure
its release or in case of forfeiture, the importer
shall offer to pay for the domestic market value of
the seized article, which offer subject to the
approval of the Commissioner may be accepted by
the Collector in settlement of the seizure case,
except when there is fraud. Upon payment of the
fine or domestic market value, the property shall
be forthwith released and all liabilities which may
or might attach to the property by virtue of the
offense which was the occasion of the seizure and

all liability which might have been incurred under

any bond given by the importer in respect to such
property shall thereupon be deemed to be
discharged. (1996 Bar Question)

FRAUDULENT PRACTICES

Q: What are the fraudulent practices considered as

criminal offenses against Customs Revenue Laws?

A:
1. Unlawful importation;
2. Entry of imported or exported article by
means of any false or fraudulent
practices, invoice, declaration, affidavit,
or other documents;
3. Entry of goods at less than their true
weights or measures or upon a
classification as to quality or value;
4. Payment of less than the amount due;
5. Filing any false or fraudulent claim for the
payment of drawback or refund of duties
upon the exportation of merchandise; or
6. Filing any affidavit, certificate or other
document to secure to himself or others
the payment of any drawback, allowance
or refund of duties on the exportation of
merchandise greater than that legally due
thereon. (Sec. 3602, TCC)

Q: Does the acquittal in criminal charge in seizure

or forfeiture proceedings operate as res judicata?

A: No, for the following reasons:

1. Criminal proceedings are actions in
personam while seizure or forfeiture
proceedings are actions in rem.
2. Customs compromise does not extinguish
criminal liability. (People v. Desiderio,
G.R. No. L-208005, Nov. 26, 1965)

REMEDIES UNDER TCC

Remedies of the Government

Q: What are the remedies of the government?

A:
1. Administrative
a. Tax lien (Sec. 1204, TCC)
b. Compromise/reduction of customs
duties (Sec. 709, 2316, TCC)
c. Seizure, search and arrest (Secs.
2205, 2210, 2211, TCC)
d. Administrative fines and forfeiture
(Sec. 2530, TCC)

2. Judicial
a. Civil action (Sec 1204, TCC)
b. Criminal action

ADMINISTRATIVE.

Tax Lien

Q: When is tax lien availed of?

A: Tax lien attaches on the goods regardless of

ownership while still in the custody of the
Government and it is availed of when the
importation is neither prohibited nor improperly
made.

Reduction of Custom Duties

Q: When is reduction of customs duties availed

of?

A: Subject to the approval of the Secretary of

Finance, the Commissioner of Customs may
compromise any case arising under this Code or
other laws or part of laws enforced by the Bureau
of Customs involving the imposition of fines,
surcharges and forfeitures unless otherwise
specified by law. (Sec. 2306, TCC)

Administrative Fines and Forfeitures

Q: When is administrative fine and forfeiture

availed of?

A: Only when the importation is unlawful and may

be exercised when the articles are no longer under
the custody of BOC unless the importation is
merely attempted in which case it may be effected
only while the goods are still within the jurisdiction
of the BOC or in the hands of the person who is
aware thereof.

JUDICIAL

Q: When can judicial remedy of either civil or

criminal action be availed of?

A: It is availed of when the tax lien is lost by the

release of the goods. The government can seek
payment of the tax liability through judicial action
since the tax liability of the importer constitutes a
personal debt to the government

Q: The Collector of Customs of the Port of Cebu

issued warrants of seizure and detention against
the importation of machineries and equipment by
LLD Import and Export Co. (LLD) for alleged
nonpayment of tax and customs duties in
violation of customs laws. LLD was notified of the
seizure, but, before it could be heard, the
Collector of Customs issued a notice of sale of the
articles. In order to restrain the Collector from
carrying out the order to sell, LLD filed with the
CTA a petition for review with application for the
issuance of a writ of prohibition. It also filed with
the CTA an appeal for refund of overpaid taxes on
its other importations of raw materials which has
been pending with the Collector of Customs. The
Bureau of Customs moved to dismiss the case for
lack of jurisdiction of the CTA:.

1. Does the CTA have jurisdiction over the

petition for review and writ of prohibition?
Explain.
2. Will an appeal to the CTA for tax refund be
possible? Explain.

A:
1. No, because there is no decision as yet by the
Commissioner of Customs which can be
appealed to the CTA. Neither the remedy of
prohibition would lie because the CTA has not
acquired any appellate jurisdiction over the
seizure case. The writ of prohibition being

merely ancillary to the appellate jurisdiction,

the CTA has no jurisdiction over it until it has
acquired jurisdiction on the petition for
review. Since there is no appealable decision,
the CTA has no jurisdiction over the petition
for review and writ of prohibition.
(Commissioner of Customs v. Alikpala, G.R No.
L-32542, 1970).

2. No, because the Commissioner of Customs

has not yet rendered a decision on the claim
for refund. The jurisdiction of the
Commissioner and the CTA are not concurrent
in so far as claims for refund are concerned.
The only exception is when the Collector has
not acted on the protested payment for a long
time, the continued inaction of the Collector
or Commissioner should not be allowed to
prejudice the taxpayer. (Nestle Philippines,
Inc. v. CA, G.R. No. 134114, July 6, 2001).
(2002 Bar Question)

Q: TCC allows the Bureau of Customs to resort to

the administrative remedy of seizure, such as by
enforcing the tax lien on the imported article, and
to the judicial remedy of filing an action in court.

When does the Bureau of Customs normally avail

itself:
1. Of the administrative, instead of the judicial
remedy?
2. Of the latter, instead of the former remedy?

A:
1. The Bureau of Customs avails of the
administrative remedy of seizure if the
imported article which is burdened by a lien
for the unpaid customs duties could still be
found.

The Bureau of Customs normally avails itself

of the administrative remedy of seizure, such
as by enforcing the tax lien on the imported

articles, instead of the judicial remedy when

the goods to which the tax lien attaches,
regardless of ownership, is still in the custody
or control of the Government. In the case,
however, of importations which are
prohibited or undeclared, the remedy of
seizure and forfeiture may still be exercised by
the Bureau of Customs even if the goods are
no longer in its custody.

2. If the imported article could no longer be

found, or if it has perished, then judicial action
through an ordinary suit for the collection of
sum of money is then filed.

On the other hand, when the goods are

properly released and thus beyond the reach
of tax lien, the government can seek payment
of the tax liability through judicial action since
the tax liability of the importer constitutes a
personal debt to the government, therefore,
enforceable by action. In this case judicial
remedy is normally availed of instead of the
administrative remedy. (1997 Bar Question)

REMEDIES OF THE TAXPAYER

Q: What are the remedies of the taxpayer?

A:
1. Administrative
a. Protest;
b. Refund, drawback, abatement;
c. Payment of fine or redemption;
d. Abandonment
e. Appeal to the Customs
Commissioner

2. Judicial
a. Appeal to the CTA;
b. Action to question the legality of
seizure;

ADMINISTRATIVE

Protest

Q: Who can make a protest and how is protest

made?

A:
1. Any importer or interested party - if
dissatisfied with published value within
15 days from date of publication or
within 5 days from date the importer is
entitled to refund in case payment is
rendered erroneous or illegal by events
occurring after the payment.

2. Taxpayer - within 15 days from

assessment. Payment under protest is
necessary.

Q: Is protest an exclusive remedy?

A: In all cases subject to protest, the interested

party who desires to have the action of the
Collector reviewed, shall make a protest, otherwise

the action of the collector shall be final and

conclusive against him.

Refund, Drawback and Abatement

Q: How is refund made?

A: All claims for refund of duties shall be made in

writing and forwarded to the Collector whom
duties are paid; and upon receipt of claim, the
Collector shall verify the same through his records;
and shall certify to the Commission with his
recommendations together with all necessary
papers and documents; and upon receipt by the
Commission, he shall cause the same to be paid if
found correct.

Q: Philippine Phosphate Fertilizer Corporation

(Philphos), a domestic corporation engaged in the
manufacture and production of fertilizers for
domestic and international distribution. It is
registered with the Philippine Export Zone
Authority (PEZA). The manufacture of fertilizers
required Philphos to purchase fuel and petroleum
products for its machineries. These fuel supplies
are considered indispensable by Philphos, as they
are used to run the machines and equipment and
in the transformation of raw materials into
fertilizer. Petron Corporation (Petron) was
Philphos supplier, which imports the same and
pays the corresponding customs duties to the
Bureau of Customs; and, the ad valorem and
specific taxes to the BIR. When the fuel and
petroleum products are delivered at Philphos
manufacturing plant, Philphos is billed by Petron
the corresponding customs duties imposed on
these products. Effectively thus, Philphos
reimburses Petron for the customs duties on the
purchased fuels and petroleum products which
are passed on by the Petron as part of the selling
price. Philphos sought the refund of customs
duties it had paid on the ground that Philphos is
entitled to tax incentives under Presidential
Decree No. 66 (EPZA Law). The Bureau of Customs
denied the claim for refund.

1. Is Philphos entitled to refund?

2. Has the claim for refund prescribed?

A:
1. Yes. The incentives offered to enterprises
duly registered with the PEZA consist,
among others, of tax exemptions. The
expectation is that the tax breaks
ultimately redound to the benefit of the
national economy, enticing as they do
more enterprises to invest and do
business within the zones; thus creating
more employment opportunities and
infusing more dynamism to the vibrant
interplay of market forces. It is clear that
Section 17(1) of EPZA Law considers such
supplies exempt even if they are used
indirectly, as they had been in this case.

2. No. The EPZA Law itself is silent on the

matter, and the prescriptive periods
under the Tariff and Customs Code and
other revenue laws are inapplicable, by
specific mandate of Section 17(1) of the
EPZA Law. Thus, the Civil Code provisions
on solutio indebiti may find application.
The Court has in the past sanctioned the
application of the provisions on solutio
indebiti in cases when taxes were
collected thru error or mistake. Thus, the
claim for refund must be commenced
within six (6) years from date of payment
pursuant to Article 1145(2) of the New
Civil Code. (Commissioner of Customs v.
Philippine Phosphate Fertilizer
Corporation, G.R. No. 144440, Sept. 1,
2004)

Q: What is duty drawback?

A: A device resorted to for enabling a commodity

affected by taxes to be exported and sold in foreign
markets upon the same terms as if it had not been
taxed at all.

Q: What is abatement?

A: It is the reduction or non-imposition of custom

duties on certain imported materials as a result of:
1.
2.
3.
or
4.

Damaged incurred during voyage;

Deficiency in contents of packages;
Loss or destruction of articles after arrival;
Death or injury of animals.

Payment of Fine or Redemption

Q: When is fine payable?

A:
GR: In case of settlement of any seizure.

XPNs:
1. When importation is absolutely
prohibited;
2. If release would be contrary to law;
3. When there is an actual and intentional
fraud.

Abandonment

Q: What is abandonment?

A: Abandonment in customs is the renunciation by

an importer of all his interests and property rights
in the importer article.

Q: How may abandonment be made?

A: Abandonment may be made expressly or

impliedly.

Q: When is abandonment express?

A: When the owner, importer, consignee of the

imported article expressly signifies in writing and
under oath to the Collector of Customs his intention
to abandon his shipment in favor of the
government. (Sec. 1801, TCC)

Q: When is abandonment implied?

A:
1. By failure to file an import entry within 30
days from the discharge of goods; or
2. Having filed an entry fails to claim within
15 days but it shall not be so effective
until so declared by the collector. (Sec.
1801, as amended by RA 7651)

Q: What are the effects of abandonment?

A:
1. Deemed to have renounced all interests
and property rights (Sec. 1801, TCC)

2. Ipso facto deemed the property of the

government
3. Disposed of in accordance with the TCC
(Sec. 1802, TCC)
4. Shall not relieve the owner from criminal
liability which may arise in connection with
the importation (Sec. 1802, TCC)

Q: Does the trial court have jurisdiction to pass

upon and nullify the seizure of cargo and
declaration in abandonment proceedings?

A: No. The trial court is incompetent to pass upon

and nullity the seizure of cargo in the
abandonment proceedings and the declaration
made by the District Collector of Customs that the
cargo was abandoned and ipso facto owned by the
government. The trial court likewise has no
jurisdiction to resolve whether or not the importer
was the owner of the cargo before it was gutted by
fire. (RV Marzan Freight, Inc. v. CA, G.R. No.
128064, Mar. 04, 2004)

Administrative Appeal

Q: To whom should appeal be filed and when?

A: To the Commissioner, within 15 days after

notification by collector of his decision.

JUDICIAL

Appeal

Q: To whom and when should appeal be filed?

A: To the CTA, within 30 days from receipt of

decision of the Commissioner of Customs or

Secretary of Finance, as the case may be.

Q: Mr. X claiming to be the owner of a vessel

which is the subject of customs warrant of seizure
and detention sought the intercession of the RTC
to restrain the Bureau of Customs from interfering
with his property rights over the vessel. Would the
suit prosper?

A: No. The proper remedy is not with the RTC but

with the CTA. Issues of ownership of goods in the
custody of customs officials are within the power of
the CTA to determine.

The Collector of Customs has exclusive jurisdiction

over seizure and forfeiture proceedings and trial
courts are precluded from assuming cognizance
over such matters even through petitions for
certiorari, prohibition or mandamus. (Commissioner
of Customs v. Court of Appeals, et al., G. R. Nos.
111202-05, Jan. 31, 2006)

Q: Compare the taxpayer's remedies under the

National Internal Revenue Code and the Tariff and
Customs Code.

TAX REMEDIES
NIRC
TCC
As to payment
Discrepancies in the form of
additional taxes are not
paid if contested

Payment must first be

effected
As to protest
There is no need for
payment under protest
Payment under protest is
required
As to who takes action in case of protest

Commissioner takes action

Collector first takes action
before the Commissioner
Filing period in protest cases
Within 30 days from the
receipt of assessment
notice
At the time of payment or
within 15 days thereafter
Period within which to decide
Commissioner is given 180
days from receipt of
complete supporting
documents.
No time period is allowed
within which the Collector
must decide the case

As to automatic review
There is no automatic
review should the
Commissioner decide
against the Government
A decision of the Customs
Commissioner against the
Government is subject to an
automatic review by the
Secretary of Finance.

Q: What are the importation procedures?

A:
Except those
entry by
necessity
Arrival at the Port of Entry
(Aircraft or Vessel of Foreign Trade)
Submission of Papers
Passenger and Cargo Manifest, Cargo Storage Plan, Store List showing Store laden
Unloading of Cargo
Entry into the Customs House
(Filing of Import Entry)
Examination of Goods
Proper tariff Classification of goods
Appraisal of Goods
Isssuance of Notice of Claim
Payment of Duties
Release of goods from the Bureau of Customs
Compliance Audit
Observance
of Entry to
the Vessel
or Air Craft
Within 30 days
from discharge
of last package
BOC Internal
Processes
Note:
Formal* and Informal Entry
generally depending on the value (if the dutiable val
ue is 2000 or less) or personal and
household effects, not in quantity for personal use
*under penalties of falsification or perjury

Submission of the bill of lading, commercial invoices and supporting documents t

o evidence quantity and dutiable value.
Liquidation of entries: may be tentative
subject to future and final readjustmen
t and settlement within a period of six
months from date of tentative liquidation
or final.

JUDICIAL REMEDIES

COURT OF TAX APPEALS

Q: What is the role of the judiciary in taxation?

A: The role of courts is limited to the application

and interpretation of tax laws. The courts check
abuses and injustices of the legislative and
administrative agents of the State in the exercise of
the power of taxation. (1972 Bar Question)

Q: What is the rationale for the creation of the

CTA?

A: It was created to prevent delay in the disposition

of tax cases by the RTC, in view of the backlog of
civil, criminal and cadastral cases accumulating in
the dockets of such courts. In addition, it was
created to have a body with specialized knowledge
which ordinary judges of the RTC are not likely to
possess, thus providing for an adequate remedy for
a speedy determination of cases.

Q: What is the nature and characteristics of the

CTA?

A:
1. It is a highly specialized body which
reviews tax cases;
2. Proceedings therein are judicial in nature;
3. Not bound by technical rules on evidence;
4. Same level with that of the Court of
Appeals, possessing all the inherent
powers of a court of justice

Q: What is the composition of the CTA?

A: The CTA consists of a presiding justice and eight

(8) associate justices appointed by the President

upon the nomination by the Judicial and Bar
Council. (R.A. 9503)

Q: How are proceedings before the CTA

conducted?

A: The CTA may sit en banc or in three (3) Divisions,

each Division consisting of three (3) Justices. The
presiding justice shall be the chairperson of the first
division and the 2 most senior associate justices
shall serve as chairpersons of the second and third
divisions, respectively. (Ibid.)

Q: What constitutes a quorum in the CTA? How is

a decision reached?

A:
1. For Sessions En Banc
4 justices shall
constitute a quorum. A decision is
reached by the concurrence of 4
members of the Court en banc.
2. For Sessions of a Division
2 justices shall
constitute a quorum and a decision is
arrived at by the concurrence of 2
members of a division(Sec. 2, R.A. 9282).

Q: What if the required quorum in a division

cannot be constituted?

A: When the required quorum cannot be

constituted due to any vacancy, disqualification,
inhibition, disability, or any other lawful cause, the
presiding justice shall designate any justice of other
divisions of the CTA to sit temporarily therein.

Q: Enumerate the powers of the CTA:

A: PCS2O2-RED
1. To administer Oath ;
2. To receive Evidence;
3. To summon witnesses by Subpoena;
4. To require Production of papers or
documents by subpoena ducestecum;
5. To punish for Contempt for the same
causes under the same procedure and
with the same penalties provided for in
the Rules of Court;
6. To issue Order authorizing distraint of
personal property and levy of real
property;
7. To prescribe Rules and regulations for the
conduct of its business;
8. To assess Damages against the appellant
if the appeal to CTA is found to be
frivolous and dilatory;
9. To Suspend collection of tax pending
appeal;
10. To render Decision on cases brought
before it.

Q: What are the significant changes under R.A.

9503?

A:
1. It enlarged the organizational structure of
the Court of Tax Appeals.
2. The number of justices was increased
from 6 to 9.
3. The divisions were also increased from 2
to 3.

Q: State the expanded jurisdiction of the CTA.

A:
1. Exclusive original jurisdiction over criminal
cases arising from violations of the NIRC
or the Tariff and Customs Code and other
laws administered by the BIR and the BOC
where the principal amount of taxes and
penalties involved is P1 million or more
and appellate jurisdiction in lieu of the CA
over the Decisions of the RTC where the
amount is less than P1 million;
2. Exclusive original jurisdiction over tax
collection cases where the principal
amount of taxes and penalties involved if
P1 million or more and the appellate
jurisdiction over decisions of the RTC
where the amount is less than P1 million;
3. Appellate jurisdiction over decisions of
the RTC in local tax cases; and
4. Appellate jurisdiction over decisions of
the Central Board of Assessment Appeals
over cases involving the assessment of
taxation of real property. (R.A. 9282)

Q: What is the salient feature of R.A. 9282

regarding appeal?

A: Decisions of the CTA are no longer appealable to

the CA. The decision of a division of the CTA may be
appealed to the CTA en banc, which in turn may be
appealed directly to the SC only on questions of
law.

JURISDICTION OF THE COURT OF TAX APPEALS

Q: What are the cases within the jurisdiction of the

CTA en banc?

A: The Court en banc shall exercise exclusive

appellate jurisdiction to review by appeal the

following:

(a) Decisions or resolutions on motions for

reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive appellate
jurisdiction over:
1. (i) Cases arising from administrative
agencies
Bureau of Internal Revenue,
Bureau of Customs, Department of
Finance, Department of Trade and
Industry, Department of Agriculture;
(ii) Local tax cases decided by the RTC in
the exercise of their original jurisdiction;
and
(iii) Tax collection cases decided by the
RTC in the exercise of their original
jurisdiction involving final and
executoryassessments for taxes, fees,
charges and penalties, where the
principal amount of taxes and penalties
claimed is less than one million pesos;

2. criminal offenses arising from violations

of the NIRC or the Tariff and Customs
Code and other laws administered by the
Bureau of Internal Revenue or Bureau of
Customs

(b) Decisions, resolutions or orders on motions for

reconsideration or new trial of the Court in Division
in the exercise of its exclusive original jurisdiction
over :
1. tax collection cases
2. involving criminal offenses arising from
violations of the NIRC or the Tariff and
Customs Code and other laws
administered by the Bureau of Internal
Revenue or Bureau of Customs;

(c) Decisions, resolutions or orders of the RTC in

decided or resolved by them in the exercise of their
appellate jurisdiction over:
1. local tax cases
2. tax collection cases

3. criminal offenses arising from violations

of the NIRC or the Tariff and Customs
Code and other laws administered by the
Bureau of Internal Revenue or Bureau of
Customs

(d) Decisions of the Central Board of Assessment

Appeals (CBAA) in the exercise of its appellate
jurisdiction over cases involving the assessment and
taxation of real property originally decided by the
provincial or city board of assessment appeals;(Sec.
2., Rule 4, A.M. No. 05-11-07-CTA).

A: The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to
review by appeal the following:
(1) Decisions of the Commissioner of
Internal Revenue

(2) Inaction by the Commissioner of

Internal Revenue

(3) Decisions, resolutions or orders of the

RTC in local tax cases decided by them in
the exercise of their original jurisdiction;

(4) Decisions of the Commissioner of

Customs in cases involving liability arising
under the Customs Law or other laws
administered by the Bureau of Customs;

(5) Decisions of the Secretary of Finance

on customs cases elevated to him
automatically for review from decisions of
the Commissioner of Customs adverse to
the Government under Section 2315 of
the TCC; and

(6) Decisions of the Secretary of Trade

and Industry, in the case of
nonagricultural product, commodity or
article, and the Secretary of Agriculture,
in the case of agricultural product,
commodity or article, involving dumping
and countervailing duties under Section
301 and 302, respectively, of the TCC, and
safeguard measures under Republic Act
No. 8800, where either party may appeal
the decision to impose or not to impose
said duties;

(b) Exclusive jurisdiction over cases involving

criminal offenses, to wit:
(1) Original jurisdiction over all criminal
offenses arising from violations of the
NIRC or TCC and other laws administered
by the BIR or the Bureau of Customs,
where the principal amount of taxes and
fees, exclusive of charges and penalties,
claimed is 1 million pesos or more; and

(2) Appellate jurisdiction over appeals

from the judgments, resolutions or orders
of the RTC in their original jurisdiction in
criminal offenses arising from violations
of the NIRC or TCC and other laws
administered by the BIR or Bureau of
Customs, where the principal amount of
taxes and fees, exclusive of charges and
penalties, claimed is less than 1 million
pesos or where there is no specified
amount claimed;

(c) Exclusive jurisdiction over tax collections cases,

to wit:
(1) Original jurisdiction in tax collection
cases involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of
taxes and fees, exclusive of charges and

penalties, claimed is 1 million pesos or

more; and

(2) Appellate jurisdiction over appeals

from the judgments, resolutions or orders
of the Regional Trial Courts in tax
collection cases originally decided by
them within their respective territorial
jurisdiction. (Sec. 3., Rule 4, A.M. No. 0511-07-CTA).

Q: Discuss the jurisdiction of the CTA as provided

for under R.A. 9282:
1. Exclusive appellate jurisdiction to review
by appeal

2. Jurisdiction over criminal offenses

a. Exclusive original jurisdiction
b. Exclusive appellate jurisdiction

3. Jurisdiction over tax collection cases

a. Exclusive original jurisdiction
b. Exclusive appellate jurisdiction

A:
1. Exclusive appellate jurisdiction to review
by appeal (DIRT- FC2)

a. Decisions of the Commissioner on

Internal Revenue in cases involving:
DRO
i. Disputed assessments;

Note: Ordinary courts have

jurisdiction over undisputed
assessments.

ii. Refunds of internal revenue

taxes, fees or other charges
and penalties imposed
thereto;
iii. Other matters arising under
NIRC or other laws
administered by the BIR.

b. Inaction by the Commissioner of

Internal Revenue in cases involving:
DRO
i. DIsputed assessments;
ii. Refunds of internal revenue
taxes, fees or other charges
and penalties imposed
thereto;
iii. Other matters arising under
NIRC or other laws
administered by the BIR,
where the NIRC provides a
specific period for action, in
which case the inaction shall
be deemed a denial.

c. Decisions, orders or resolutions of

the Regional Trial Courtsin local tax
cases originally decided or resolved
by them in the exercise of their
original or appellate jurisdiction.

d. Decisions of the Commissioner of

Customs in cases involving: DSFO
i. Liability for customs Duties,
fees or other money charges;
ii. Seizure, detention or release
of property affected;
iii. Fines, forfeitures or other
penalties in relation thereto;
iv. Other matters arising under
Customs Law or other laws
administered by the Bureau
of Customs

e. Decisions of the Central Board of

Assessment Appealsin the exercise of
its appellate jurisdiction over cases
involving the assessment and
taxation of real property originally
decided by the provincial or city
board of assessment appeals;

f. Decisions of the Secretary of Finance

on custom cases elevated to him
automatically for review from
decisions of the Commissioner of
Customs which are adverse to the
Government under Section 2315 of
the Tariff and Customs Code;

g. Decisions of the Secretary of Trade

and Industry, in the case of nonagricultural product, commodity or
article, and the Secretary of
Agriculture in the case of agricultural
product, commodity or article,
involving dumping and
countervailing duties under Sections
301 and 302, respectively of the
Tariff and Customs Code, and
safeguard measures under RA 8800,
where either party may appeal the
decision to impose or not to impose
said duties.

2. Jurisdiction over cases involving criminal

offenses
a. Exclusive original jurisdiction over all
criminal offenses arising from
i. Violations of the National
Internal Revenue Code(NIRC);
or
ii. The Tariff and Customs
Code(TCC) and
iii. Other laws administered by the
Bureau of Internal Revenue(BIR)
or the Bureau of Customs(BOC).

Note: If the principal amount of taxes and fees,

exclusive of charges and penalties, claimed is less
than 1M or if there is no specified amount
the
claimed, shall be tried by the regular courts
CTA s jurisdiction shall be appellate.

Despite any provision of law or of the Rules of

Court, the criminal action and the corresponding
civil action for the recovery of the civil liability for
taxes and penalties, shall at all times be
simultaneously instituted with, and jointly
determined in the same proceeding by the CTA
the filing of the criminal action is deemed to
necessarily carry with it the filing of civil action.

Hence, no right to reserve the filing of such civil

action separately from the criminal action will be
recognized.

b. Exclusive appellate jurisdiction in

criminal offenses:

i. Over appeals from the

judgments, resolutions or
orders of the RTC in tax cases
originally decide by them, in
their respective territorial
jurisdiction.

ii. Over petitions for review of the

judgments, resolutions or
orders of the RTC in the exercise
of their appellate jurisdiction
over tax cases originally decided
by the Metropolitan Trial
Courts, Municipal Trial Courts
and Municipal Circuit Trial
Courts in their respective
jurisdiction.

3. Jurisdiction over tax collection cases

a. Exclusive original jurisdiction in tax

collection cases involving final and
executory assessments for taxes,
fess, charges and penalties:

Note: Collection cases where the principal

amount of taxes and fees, exclusive of
charges, and penalties, claimed, is less than
P1M shall be tried by the proper MTC,
Metropolitan Trial Court and RTC.

b. Exclusive appellate jurisdiction in tax

collection cases:

i. Over appeals from the

judgments, resolutions or
orders of the RTC; in tax

collection cases originally

decided by them, in their

respective territorial
jurisdiction.
ii. Over petitions for review of the
judgments, resolutions or
orders of the RTCs in the
exercise of their appellate
jurisdiction over tax collection
cases originally decided by the
Metropolitan Trial Courts,
Municipal Trial Courts and
Municipal Circuit Trial Courts, in
their respective jurisdiction.

JUDICIAL PROCEDURES

Judicial Action For Collection Of Taxes

Local Taxes

Q: How does the LGU concerned enforce the

judicial remedy in collection of taxes?

A: The LGU concerned may enforce the collection of

delinquent taxes, fees, charges and other revenues
by civil action in any court of competent
jurisdiction. The civil action shall be filed by the
local treasurer within five (5) years from delinquent
taxes, fees or charges become due.

Note: The local government files an ordinary suit for

the collection of sum of money before the MTC, RTC or
CTA depending upon the jurisdictional amount.

Q: What are the prescriptive periods of

assessment and collection of local taxes?

Prescriptive Period for taxes, fees, or charges

Assessment
5 years from date
they became due
Collection
No action can be brought whether
administrative or judicial shall be
instituted after the expiration of the
period to access

Note:In case of
of taxes, fees,
within ten (10)
intent to evade

fraud or intent to evade the payment

or charges, the same may be assessed
years from discovery of the fraud or
payment (Sec. 194, LGC).

Q: What are the instances wherein the running of

the prescriptive period for assessment and
collection of local taxes will be suspended?

A: The following are the instances that will suspend

the running of the prescriptive period for
assessment and collection of local taxes:
a. The Treasurer is legally prevented from
making the assessment or collection;
b. The taxpayer requests for a
reinvestigation and executes a waiver in
writing before the expiration of the
period within which to assess or collect;
and
c. (c ) The taxpayer is out of the country or
otherwise cannot be located (Sec. 194,
LGC)

CIVIL CASES

Q: Who may appeal?

A: The party who may appeal are the following:

(a) A party adversely affected by a decision, ruling

or the inaction of the Commissioner of Internal
Revenue on disputed assessments or claims for
refund of internal revenue taxes, or by a decision or
ruling of the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and
Industry, the Secretary of Agriculture, or a Regional
Trial Court in the exercise of its original jurisdiction
may appeal to the Court by petition for review filed
within 30 days after receipt of a copy of such
decision or ruling, or expiration of the period fixed
by law for the Commissioner of Internal Revenue to
act on the disputed assessments. In case of inaction
of the Commissioner of Internal revenue on claims
for refund of internal revenue taxes erroneously or
illegally collected, the taxpayer must file a petition
for review within the two-year period prescribed by
law from payment or collection of the taxes.

(b) A party adversely affected by a decision or

resolution of a Division of the Court on a motion for
reconsideration or new trial may appeal to the
Court by filing before it a petition for review within
fifteen days from receipt of a copy of the
questioned decision or resolution. Upon proper
motion and the payment of the full amount of the
docket and other lawful fees and deposit for costs
before the expiration of the reglementary period
herein fixed, the Court may grant an additional
period not exceeding fifteen days from the
expiration of the original period within which to file
the petition for review.

(c) A party adversely affected by a decision or ruling

of the Central Board of Assessment Appeals and the
Regional Trial Court in the exercise of their
appellate jurisdiction may appeal to the Court by
filing before it a petition for review within thirty
days from receipt of a copy of the questioned
decision or ruling. (Sec. 3., Rule 8, A.M. No. 05-1107-CTA).

Q: How is appeal made?

A: The venue and mode of appeal are the

following:

(a) An appeal from a decision or ruling or the

inaction of the Commissioner of Internal Revenue
on disputed assessments or claim for refund of
internal revenue taxes erroneously or illegally
collected, the decision or ruling of the
Commissioner of Customs, the Secretary of Finance,
the Secretary of Trade & Industry, the Secretary of
Agriculture, and the Regional Trial Court in the
exercise of their original jurisdiction, shall be taken
to the Court by filing before it a petition for review
as provided in Rule 42 of the Rules of Court. The
Court in Division shall act on the appeal.

(b) An appeal from a decision or resolution of the

Court in Division on a motion for reconsideration or
new trial shall be taken to the Court by petition for
review as provided in Rule 43 of the Rules of Court.
The Court en banc shall act on the appeal.

(c) An appeal from a decision or ruling of the

Central Board of Assessment Appeals or the
Regional Trial Court in the exercise of their
appellate jurisdiction shall be taken to the Court by
filing before it a petition for review as provided in
Rule 43 of the Rules of Court. The Court en banc
shall act on the appeal. (Sec. 4., Rule 8, A.M. No. 0511-07-CTA).

Note: The 30 day prescriptive period is jurisdictional.

Q: BIR issued a Final Assessment Notice of income

tax and VAT deficiencies to a taxpayer on August
6, 2003 which the latter contested by letter of
September 23, 2003. The BIR thereafter issued a
Final Decision on Disputed Assessment (FDDA)
dated August 2, 2005 which the taxpayer received
on August 4, 2005 denying the letter of protest
and requesting the immediate payment thereof
inclusive of penalties incident to delinquency. It
added that if he disagrees, he may appeal to the
CTA within 30 days from date of its receipt
otherwise the deficiency income and value-added

taxes assessments shall become final, executory

and demandable. Instead of appealing to the CTA,
the taxpayer filed a Letter of Reconsideration to
the BIR on September 1, 2005. By a Preliminary
Collection Letter dated September 6, 2005, the BIR
demanded payment of the taxpayer s liabilities
prompting him to file on October 20, 2005 a
Petition for Review before the CTA. In its Answer,
BIR argued, among other things, that the petition
was filed out of time. Is the argument of the BIR
valid?

A: Yes. Under Section 228 of the 1997 Tax Code, the

taxpayer had 30 days to appeal the denial of its
protest to the CTA. Since the denial of the
administrative protest on August 4, 2005, it had
until September 3, 2005 to file a petition for review
before the CTA Division. It filed one, however, on
October 20, 2005, hence, it was filed out of time for
a motion for reconsideration of the denial of the
administrative protest does not toll the 30-day
period to appeal to the CTA. (Fishwealth Canning
Corporation v. CIR, G.R. 179343, Jan. 21, 2010)

Q: What is the remedy of a party affected by a

ruling, decision, or ruling of a Division of the CTA?

A: A party adversely affected by a ruling, order or

decision of a Division of the CTA may file a motion
for reconsideration or new trial before the same
Division of the CTA within fifteen (15) days from
notice thereof.

However in criminal cases, the general rule

applicable in regular Courts on matters of
prosecution and appeal shall likewise apply.

Q: What is the remedy of a party affected by a

resolution of a Division of the CTA?

A: A party adversely affected by a resolution of a

Division of the CTA on a motion for reconsideration
or new trial, may file a petition for review with the
CTA en banc.

Q: How about the remedy of a party affected by a

decision or ruling of the CTA en banc?

A: A party
of the CTA
a verified
to Rule 45

adversely affected by a decision or ruling

en banc may file with the Supreme Court
petition for review on certiorari pursuant
of the 1997 Rules of Civil Procedure.

Q: What is the effect of the perfection of an

appeal?

A:
GR: Appeal to the CTA shall not suspend
payment, levy, distraint and/or sale of any
property of taxpayer for the satisfaction of his
liability.

XPN: If in the opinion of the CTA, the collection

may jeopardize the interest of the government
and/or the taxpayer.

In this case, collection may be suspended at any

stage of the proceeding but taxpayer shall be
required either:

1. To deposit (with the court) the amount

claimed; or
2. To file a surety bond (with the court) for
not more than double the amount of the
tax due.

Q: If there is a request or motion for

reconsideration, what is the appealable decision?

A: It is the decision denying the request or motion.

The filing of a civil action in court to collect a tax
which was the subject of a pending protest in the
BIR was a justifiable basis for the taxpayer to appeal
to the CTA and to move for the dismissal in the trial
court of the Government s action to collect the tax
under dispute. (Yabes v. Flojo, G.R. No. L-46954,
July 20, 1982)

Q: May the collection of taxes be enjoined?

A: Collection of taxes should not be enjoined except
upon clear showing of a right to an exemption.
Reason: Lifeblood theory. (Northern Lines Inc. v. CA,
G.R. No. L-41376-77, June 29, 1988)

GR: Collection of internal revenue taxes and

customs duties cannot be enjoined.

XPN: CTA is empowered to suspend the collection

of internal revenue taxes and custom duties in
cases pending appeal only when:

(1) in the opinion of the court the collection by the

BIR will jeopardize the interest of the government
and/ or taxpayer; and
(2) the taxpayer is willing to deposit the amount
being collected or to file a surety bond for more
than double the amount of the tax to be fixed by
the court (Sec. 11, R.A. 1125).

Taking of Evidence

Q: How are evidence taken in the proceedings

before the CTA?

A: Evidence can be taken by a justice assigned to

take evidence, the hearing before such justice shall
proceed in all respects as though the same had
been made before the Courtor by a court official in
default or ex parte hearings, or in any case where
the parties agree in writing, but the Court official
have no power to rule on objections to any
question or to the admission of exhibits, which
objections shall be resolved by the Court upon
submission of his report and the transcripts within
ten days from termination of the hearing (Sec. 3 &
4., Rule 12, A.M. No. 05-11-07-CTA).

In case of voluminous documents or long accounts

the party who desires to introduce in such evidence
must, upon motion and approval by the Court, refer
the voluminous documents to an independent
Certified Public Accountant (CPA) for the purpose of
presenting: (1) a summary of the invoices or
receipts and the amount(s) of taxes paid and (2) a
certification of the independent CPA attesting to
the correctness of the contents of the summary
after making an examination, evaluation and audit
of voluminous receipts, invoices or long accounts
(Sec. 5., Rule 12, A.M. No. 05-11-07-CTA).

Motion for Reconsideration/ New Trial

Q: Who and when to file a motion for

reconsideration or new trial?

A: Any aggrieved party may seek a reconsideration

or new trial of any decision, resolution or order of
the Court. He shall file a motion for reconsideration
or new trial within fifteen days from the date he
received notice of the decision, resolution or order
of the Court in question. (Sec. 1., Rule 15, A.M. No.
05-11-07-CTA).

Q: What are the grounds for filing a motion for

new trial?

A: A motion for new trial may be based on one or

more of the following causes materially affecting
the substantial rights of the movant:

(a) Fraud, accident, mistake or excusable negligence

which ordinary prudence could not have guarded
against and by reason of which such aggrieved
party has probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not,

with reasonable diligence, have discovered and
produced at the trial and, which, if presented,
would probably alter the result.

A motion for new trial shall include all grounds then

available and those not included shall be deemed
waived (Sec. 5., Rule 15, A.M. No. 05-11-07-CTA).

Q: What is the effect of filing a motion for

reconsideration or new trial?

A: The filing of a motion for reconsideration or new

trial shall suspend the running of the period within
which an appeal may be perfected. (Sec. 4., Rule 15,
A.M. No. 05-11-07-CTA).

Note: No party shall be allowed to file a second motion

for reconsideration of a decision, final resolution or
order; or for new trial (Sec. 4., Rule 15, A.M. No. 05-11-

07-CTA).

A pro forma request for reconsideration or one that

is directed to the Secretary of Finance, does not
suspend the period.

Appeal to CTA, en banc

Q: May a decision or resolution of the CTA in

Division be appealable directly to the CTA En Banc
in its exercise of its exclusive appellate
jurisdiction?

A: No, the petition for review of a decision or

resolution of the Court in Division must be
preceded by the filing of a timely motion for
reconsideration or new trial with the Division. (Sec.
1., Rule 8, A.M. No. 05-11-07-CTA).

Petition for Review on Certiorari to the

Supreme Court

Q: Who may file an appeal to the Supreme Court

by petition for review on certiorari?

A: A party adversely affected by a decision or ruling

of the Court en banc may appeal therefrom by filing
with the Supreme Court a verified petition for
review on certiorari within 15 days from receipt of a
copy of the decision or resolution, as provided in
Rule 45 of the Rules of Court. If such party has filed
a motion for reconsideration or for new trial, the
period herein fixed shall run from the party s
receipt of a copy of the resolution denying the
motion for reconsideration or for new trial. (Sec. 1.,
Rule 16, A.M. No. 05-11-07-CTA).

Q: What is the effect of the appeal?

A: The motion for reconsideration or for new trial

filed before the Court shall be deemed abandoned
if, during its pendency, the movant shall appeal to
the Supreme Court (Sec. 1., Rule 16, A.M. No. 0511-07-CTA).

Q: Which court has jurisdiction over undisputed

assessments?

A: Since it is an action for the collection of sum of

money, the CTA has exclusive original jurisdiction
over undisputed assessments when the amount
involved is One Million (P1,000,00) or more.

However, where the amount is less then

P1,000,000, it is the RTC or the MTC that has
jurisdiction, as the case may be ,depending on the
jurisdictional amount.

Q: Define undisputed assessments.

A: These are assessments that are already final and

collectible because the taxpayer failed to
seasonably protest the assessment within a period
of 30 days from receipt of the notice of assessment.

Q: Will the CTA acquire jurisdiction even in the

absence of a decision of the CIR or Commissioner
of Customs?

A:
GR: CTA has jurisdiction only if there is a
decision of the Commissioner of Internal
Revenue or Commissioner of Customs.

XPNS:
1. If Commissioner of Customs has not
rendered a decision and the suit is about
to prescribe;

Reason: If the taxpayer waits, then his

right of action prescribes.

2. If the Commissioner of Internal Revenue

has not acted in a refund case and the 2year prescriptive period is about to
expire; or
Reason: The taxpayer would be left at
the mercy of the Commissioner, who
by his delay leaves the taxpayer
without any positive and expedient
relief from the courts.

3. Where the Commissioner of Internal

Revenue has not acted upon a protested
assessment within 180 days from
submission of all relevant documents
supporting the protest, the taxpayer
adversely affected by the inaction may
appeal to the CTA within 30 days from the
lapse of the 180 day period.

Q: Does the CTA have jurisdiction over dispute

between the Philippine National Bank (PNB) and
the BIR relative to deficiency withholding tax
assessment?

A: Yes. Disputes, claims, and controversies falling

under section 7 of R.A. 1125, even though solely
among government offices, agencies, and
instrumentalities, including government owned or
controlled corporations, remain in the exclusive
jurisdiction of the CTA. P.D. 242 which deals with
administrative settlement or adjudication of
disputes, claims and controversies between or
among government offices, agencies and
instrumentalities, including government owned or
controlled corporations, does not affect R.A. 1125,

the law creating the CTA and defines its jurisdiction.

P.D. 242 is a general law while R.A. 1125 is a special
law therefore following the rule on the rule on
statutory construction, R.A. 1125 should prevail. It
is the CTA and not the BIR which has jurisdiction to
settle or adjudicate BIR s assessment against PNB.
(PNOC v. CA, G.R. no. 109976,April 26, 2005)

Q: Is a simultaneous filing of the application with

the BIR for refund/credit and the institution of
acourt suit for the same case with the CTA
allowed?

A: Yes. There is no need to wait for a BIR denial.

Reasons:
1. The positive requirement of Sec. 229, NIRC;
2. The doctrine that delay of the Commissioner
in rendering decision does not extend the
peremptory period fixed by the statute;
3. The law fixed the same period of 2 years for
filing a claim for refund with the
Commissioner under Sec. 204 [C], NIRC of
1997, unlike in protests of assessments
under Sec. 228, NIRC of 1997, which fixed
the period (thirty days from receipt of
decision) for appealing to the Court, thus
clearly implying that the prior decision of
the Commissioner is necessary to take
cognizance of the case. (CIR v. BPI, etc. et.
al., CA G.R. SP No. 34102, Sept. 9, 1994)

Q: On June 1, 2003, Global Bank received a final

notice of assessment from the BIR for deficiency
documentary stamp tax in the amount of P5
Million. On June 30, 2003, Global Bank filed a
request for reconsideration with the
Commissioner of Internal Revenue. The
Commissioner denied the request for
reconsideration only on May 30, 2006, at the same
time serving on Global Bank a warrant of distraint
to collect the deficiency tax. If you were its
counsel, what will be your advice to the bank?
Explain.

A: The denial for the request for reconsideration is

the final decision of the CIR. I would advise Global

Bank to appeal the denial to the CTA within 30 days

from receipt. I will further advise the bank to file a
motion for injunction with the CTA to enjoin the
Commissioner from enforcing the assessment
pending resolution of the appeal. While an appeal
to the CTA will not suspend the payment, levy,
distraint, and/or sale of any property of the
taxpayer for the satisfaction of its tax liability, the
CTA is authorized to give injunctive relief if the
enforcement would jeopardize the interest of the
taxpayer, as in this case, where the assessment has
not become final (Lascona Land Co. v. CIR, CTA Case
No. 5777, January 4, 2000). (2006 Bar Question)

Q: In the investigation of the withholding tax

returns of AZ Medina Security Agency (AZ Medina)
for the taxable years 1997 and 1998, a discrepancy
between the taxes withheld from its employees
and the amounts actually remitted to the
government was found. Accordingly, before the
period of prescription commenced to run, the BIR
issued an assessment and a demand letter calling
for the immediate payment of the deficiency
withholding taxes in the total amount of P250,
000.00. Counsel for AZ Medina protested the
assessment for being null and void on the ground
that no pre-assessment notice had been issued.
However, the protest was denied. Counsel then
filed a petition for prohibition with the Court of
Tax Appeals to restrain the collection of the tax.
Will the special civil action for prohibition brought
before the CTA under Sec. 11 of R.A, No. 1125
prosper? Discuss your answer.

A: The special civil action for prohibition will not

prosper, because the CTA has no jurisdiction to
entertain the same. The power to issue writ of
injunction provided for under Section 11 of RA 1125
is only ancillary to its appellate jurisdiction. The CTA
is not vested with original jurisdiction to issue writs
of prohibition or injunction independently of and
apart from an appealed case. The remedy is to
appeal the decision of the BIR. (Collector v. Yuseco,
L-12518, October 28, 1961). (2002 Bar Question)

Q: Mr. Abraham Eugenio, a pawnshop operator,

after having been required by the Revenue District
Officer to pay value added tax pursuant to a
Revenue Memorandum Order (RMO) of the
Commissioner of Internal Revenue, filed with the
RTC an action questioning the validity of the RMO.
If you were the judge, will you dismiss the case?

A: Yes. The RMO

Commissioner in
the Tax Code on
Jurisdiction to
lodged with the
Bar Question)

is in reality a ruling of the

implementing the provisions of
the taxability of pawnshops.
review rulings of the Commissioner is
CTA and not with the RTC. (2006

Q: The Collector of Customs of the Port of Cebu

issued warrants of seizure and detention against
the importation of machineries and equipment by
LLD Import and Export Co. (LLD) for alleged
nonpayment of tax and customs duties in violation
of customs laws. LLD was notified of the seizure,
but, before it could be heard, the Collector of
Customs issued a notice of sale of the articles. In
order to restrain the Collector from carrying out

the order to sell, LLD filed with the Court of Tax

Appeals a petition for review with application for
the issuance of a writ of prohibition. It also filed
with the CTA an appeal for refund of overpaid
taxes on its other importations of raw materials
which has been pending with the Collector of
Customs. The Bureau of Customs moved to dismiss
the case for lack of jurisdiction of the Court of Tax
Appeals.

Does the Court of Tax Appeals have jurisdiction

over the petition for review and writ of
prohibition? Explain.

A: No, because there is no decision as yet by the

Commissioner of Customs which can be appealed
to the CTA. Neither the remedy of prohibition
would lie because the CTA has not acquired any
appellate jurisdiction over the seizure case. The writ
of prohibition being merely ancillary to the
appellate jurisdiction, the CTA has no jurisdiction
over it until it has acquired jurisdiction on the
petition for review. Since there is no appealable
decision, the CTA has no jurisdiction over the
petition for review and writ of prohibition.
(Commissioner of Customs v. Alikpala, L-32542, 26
November 1970).

Q: Will an appeal to the CTA for tax refund be

possible? Explain

A: No, because the Commissioner of Customs has

not yet rendered a decision on the claim for refund.
The jurisdiction of the Commissioner and the CTA
are not concurrent in so far as claims for refund are
concerned. The only exception is when the
Collector has not acted on the protested payment
for a long time, the continued inaction of the
Collector or Commissioner should not be allowed to
prejudice the taxpayer. (Nestle Philippines, Inc. v.
CA, GR No. 134114, July 6, 2001). (2002 Bar
Question)

Q: RR disputed a deficiency tax assessment and

upon receipt of an adverse decision by the
Commissioner of Internal Revenue, filed an appeal
with the CTA. While the appeal is pending, the BIR
served a warrant of levy on the real properties of
RR to enforce the collection of the disputed tax.

Granting arguendo that the BIR can legally levy on

the properties, what could RR do to stop the
process? Explain briefly.

A: RR should file a motion for injunction with the

CTA to stop the administrative collection process.
An appeal to the CTA shall not suspend the
enforcement of the tax liability, unless a motion to
that effect shall have been presented in court and
granted by it on the basis that such collection will
jeopardize the interest of the taxpayer or the
Government (Pirovano v. CIR, 14 SCRA 832 [1965]).

The CTA is empowered to suspend the collection of

internal revenue taxes and customs duties in cases
pending appeal only when: (1) in the opinion of the
court the collection by the BIR will jeopardize the
interest of the Government and/or the taxpayer;
and (2) the taxpayer is willing to deposit the
amount being collected or to file a surety bond for
not more than double the amount of the tax to be
fixed by the court (Section 11, R.A. No. 1125). (2004
Bar Question)

Q: A Co., a Philippine corporation, is the owner of

machinery, equipment and fixtures located at its
plant in Muntinlupa City. The City Assessor
characterized all these properties as real
properties subject to the real property tax. A Co.
appealed the matter to the Muntinlupa Board of
Assessment Appeals. The Board ruled in favor of
the City. In accordance with R.A: 1125 (An Act
creating the CTA). A Co. brought a petition for
review before the CTA to appeal the decision of
the City Board of Assessment Appeals. Is the
Petition for Review proper? Explain.

A: No. The CTA s devoid of jurisdiction to entertain

appeals from the decision of the City Board of
Assessment Appeals. Said decision is instead
appealable to the CBAA, which under the Local
Government Code, has appellate jurisdiction over
decisions of Local Board of Assessment Appeals.
(Caltex Phil, Foe. v. Central Board of Assessment
Appeals, L50466, May 31, 1982) (1999 Bar
Question)

Q: A taxpayer received, on 15 January 1996 an assessment for an internal revenue tax deficiency.
On 10 February 1996, he forthwith filed a petition

for review with the CTA could the Tax Court

entertain the petition?

A: No. Before a taxpayer can avail of judicial

remedy he must first exhaust administrative
remedies by filing a protest within 30 days from
receipt of the assessment. It is the Commissioner's
decision on the protest that gives the Tax Court
jurisdiction over the case provided that the appeal
is filed within 30 days from receipt of the
Commissioner's decision. An assessment by the BIR
is not the Commissioner's decision from which a
petition for review may be filed with the CTA.
Rather, it is the action taken by the Commissioner
in response to the taxpayer s protest on the
assessment that would constitute the appealable
decision. (Sec. 7, RA 1125)

Q: Under the above factual setting, the taxpayer,

instead of questioning the assessment he received
on 15 January 1996 paid, on 01 March 1996 the
"deficiency tax" assessed. The taxpayer requested
a refund from the Commissioner by submitting a
written claim on 01 March 1997. It was denied.
The taxpayer, on 15 March 1997, filed a petition
for review with the CA. Could the petition still be
entertained?

A: No, the petition for review can not be

entertained by the CA, since decisions of the
Commissioner on cases involving claim for tax
refunds are within the exclusive and primary
jurisdiction of the CTA. (Sec. 7, RA1125) (1997 Bar
Question)

Q: A Co., a Philippine corporation, received an

income tax deficiency assessment from the BIR on
May 5, 1995. On May 31, 1995, A Co. filed its
protest with the BIR. On July 30, 1995, A Co.
submitted to the BIR all relevant supporting
documents. The CIR did not formally rule on the
protest but on January 25, 1996, A Co. was served
a summons and a copy of the complaint for
collection of the tax deficiency filed by the BIR
with the RTC. On February 20, 1996, A Co. brought
a Petition for Review before the CTA: The BIR
contended that the Petition is premature since
there was no formal denial of the protest of A Co.
and should therefore be dismissed.

Does the CTA have jurisdiction over the case?

A: Yes, the CTA has jurisdiction over the case

because this qualifies as an appeal from the
Commissioner's decision on disputed assessment.
When the Commissioner decided to collect the tax
assessed without first deciding on the taxpayer's
protest, the effect of the Commissioner s action of
filing a judicial action for collection is a decision of
denial of the protest, in which event the taxpayer
may file an appeal with the CTA: (Republic v. Lim
TianTeng& Sons, Inc., 16 SCRA 584; Dayrit v. Cruz, L39910, Sept. 26, 1988).

Q: Has the RTC jurisdiction over the collection case

filed by the BIR? Explain.

A: The RTC has no jurisdiction over the collection

case filed by the BIR. The filing of an appeal with
the CTA has the effect of divesting the RTC of
jurisdiction over the collection case. At the moment
the taxpayer appeals the case to the CTA in view of
the Commissioner's filing of the collection case with
the RTC which was considered as a decision of
denial, it gives a justifiable basis for the taxpayer to
move for dismissal in the RTC of the Government
action to collect the tax liability under dispute.
(Yabes v. Flojo, 15 SCRA 278; San Juan v. Vasquez, 3
SCRA 92). There is no final, executory and
demandable assessment which can be enforced by
the BIR, once a timely appeal is filed. (1999 Bar
Question)

Q: A taxpayer received a tax deficiency assessment

of P1.2 Million from the BIR demanding payment
within 10 days; otherwise, it would collect through
summary remedies. The taxpayer requested for a
reconsideration stating the grounds therefor.
Instead of resolving the request for
reconsideration, the BIR sent a Final Notice before
Seizure to the taxpayer. May this action of the
Commissioner of Internal Revenue be deemed a
denial of the request for reconsideration of the
taxpayer to entitle him to appeal to the CTA?
Decide with reasons.

A: Yes, the final notice before seizure was in effect

a denial of the taxpayer's request for
reconsideration, not only was the notice the only
response received, its nature, content and tenor
supports the theory that it was the BIR's final act
regarding the request for reconsideration. (CIR v.
Isabela Cultural Corporation, G.R. No. 135210, July
11, 2001) (2005 Bar Question)

Q: Does the CTA have jurisdiction over an action to

collect on a bond used to secure payment of
taxes?

A: An action filed by the Bureau of Customs against

a bonding company to collect on a bond used to
secure payment of taxes is not a tax collection case
but rather a simple case for enforcement of a
contractual liability. Hence, appellate jurisdiction
over the case properly lies with the Court of

Appeals rather than the Court of Tax Appeals (Phil.

British Assurance Co., Inc. v. Republic of the Phil.,
G.R. No. 185588 , Feb. 2, 2010).

CRIMINAL CASES

Institution And Prosecution Of Criminal Actions

Q: How are criminal actions instituted?

A: All criminal actions before the Court in Division in

the exercise of its original jurisdiction shall be
instituted by the filing of an information in the
name of the People of the Philippines. In criminal
actions involving violations of the National Internal
Revenue Code and other laws enforced by the
Bureau of Internal Revenue, the Commissioner of

Internal Revenue must approve their filing. In

criminal actions involving violations of the tariff and
Customs Code and other laws enforced by the
Bureau of Customs, the Commissioner of Customs
must approve their filing. (Sec. 2., Rule 9, A.M. No.
05-11-07-CTA).

Note: The institution of the criminal action shall

interrupt the running of the period of prescription.
(Ibid)

Q: How are criminal actions prosecuted?

A: All criminal actions shall be conducted and

prosecuted under the direction and control of the
public prosecutor. In criminal actions involving
violation of the National Internal Revenue Code or
other laws enforced by the Bureau of Internal
Revenue, and violations of the Tariff and Customs
Code or other laws enforced by the Bureau of
Customs, the prosecution may be conducted by
their respective duly deputized legal officers (Sec.
3., Rule 9, A.M. No. 05-11-07-CTA).

Q: What is the rule on the Institution on civil

action in criminal action?

A: In cases within the jurisdiction of the Court, the

criminal action and the corresponding civil action
for the recovery of civil liability for taxes and
penalties shall be deemed jointly instituted in the
same proceeding. The filing of the criminal action
shall necessarily carry with it the filing of the civil
action. No right to reserve the filing of such civil
action separately from the criminal action shall be
allowed or recognized (Sec. 11, Rule 9, A.M. No. 0511-07-CTA)

Appeal and Period to Appeal

Q: How to appeal and what is the period to

appeal?

A:
(a) An appeal to the Court in criminal cases decided
by a Regional Trial Court in the exercise of its
original jurisdiction shall be taken by filing a notice
of appeal pursuant to Sections 3(a) and 6, Rule 122
of the Rules of Court within 15 days from receipt of
a copy of the decision or final order with the court
which rendered the final judgment or order
appealed from and by serving a copy upon the
adverse party. The Court in Division shall act on the
appeal.

(b) An appeal to the Court en banc in criminal cases

decided by the Court in Division shall be taken by
filing a petition for review as provided in Rule 43 of
the Rules of Court within fifteen days from receipt
of a copy of the decision or resolution appealed
from. The Court may, for good cause, extend the
time for filing of the petition for review for an
additional period not exceeding fifteen days.
(c) An appeal to the Court in criminal cases decided
by the Regional Trial Courts in the exercise of their
appellate jurisdiction shall be taken by filing a
petition for review as provided in Rule 43 of the
Rules of Court within fifteen days from receipt of a
copy of the decision or final order appealed from.
The Court en banc shall act on the appeal (Sec. 9,
Rule 9, A.M. No. 05-11-07-CTA)

Q: Who shall represent the People in the criminal

action?

A: The Solicitor General shall represent the People

of the Philippines and government officials sued in
their official capacity in all cases brought to the
Court in the exercise of its appellate jurisdiction. He
may deputized the legal officers of the Bureau of
Internal Revenue in cases brought under the
National Internal Revenue Code or other laws
enforced by the Bureau of Internal Revenue, or the
legal officers of the Bureau of Customs in cases
brought under the Tariff and Customs Code of the
Philippines or other laws enforced by the Bureau of
Customs, to appear in behalf of the officials of said
agencies sued in their official capacity: Provided,
however, such duly deputized legal officers shall
remain at all times under the direct control and
supervision of the Solicitor General (Sec. 10, Rule 9,
A.M. No. 05-11-07-CTA).

Petition for Review on Certiorari

to the Supreme Court

Q: Who may file an appeal to the Supreme Court

by petition for review on certiorari?

A: A party adversely affected by a decision or ruling

of the Court en banc may appeal therefrom by filing
with the Supreme Court a verified petition for
review on certiorari within 15 days from receipt of a
copy of the decision or resolution, as provided in
Rule 45 of the Rules of Court. If such party has filed
a motion for reconsideration or for new trial, the
period herein fixed shall run from the party s
receipt of a copy of the resolution denying the
motion for reconsideration or for new trial. (Sec. 1.,
Rule 16, A.M. No. 05-11-07-CTA).

Q: What is the effect of the appeal?

A: The motion for reconsideration or for new trial

filed before the Court shall be deemed abandoned
if, during its pendency, the movant shall appeal to
the supreme Court (Sec. 1., Rule 16, A.M. No. 05-1107-CTA).

Q: What does other matters

TCC Law mean?

under the NIRC or

A: The term other matters includes cases which

can be considered within the scope of the function
of the BIR and BOC by applying the ejusdem generis
rule (that is, such cases should be of the same
nature as those that have preceded them.)

E.g.,Where a taxpayer has paid his taxes, but it

turns out that the payments were supported by
spurious or fake receipts and the BIR issued an
assessment notice to collect the amounts allegedly
paid, the CTA would have jurisdiction. This is a
question that is related to a tax assessment.
(Benguet Corporation v. CIR, CTA Case No. 4795,
July 23, 1996).

TAXPAYER S SUIT IMPUGNING THE VALIDITY OF

TAX MEASURES OR ACTS OF TAXING AUTHORITIES

TAXPAYER S SUIT

Q: What is a taxpayer s suit?

A: It is a case where the act complained of directly

involves the illegal disbursement of public funds
collected through taxation.

Taxpayer s Suit Distinguished From Citizens Suit

Q: How do you distinguish taxpayer s suit from

citizens suit?

A: In the former, the plaintiff is affected by the

expenditure of public funds, while in the latter; he
is but the mere instrument of the public concern.

Furthermore, as held by the New York Supreme

Court in People ex rel Case v. Collins: "In matter of
mere public right, however the people are the real
parties It is at least the right, if not the duty, of
every citizen to interfere and see that a public
offence be properly pursued and punished, and
that a public grievance be remedied."

With respect to taxpayer s suits, Terr v. Jordan held

that "the right of a citizen and a taxpayer to
maintain an action in courts to restrain the unlawful
use of public funds to his injury cannot be denied."
(David vs. Macapagal-Arroyo, G.R. No. 171396, May
3, 2006)

Q: What are the requisites before a citizen may file

a taxpayer s suit?

A:
1. That money is being extracted and spent
in violation of specific constitutional
protections against abuses of legislative
power;
2. That public money is being deflected to
any improper purpose; and
3. That the petitioner seeks to restrain
respondents from wasting public funds
through the enforcement of an invalid or
unconstitutional law.

Note: However, the SC has discretion as to whether or

not entertain a taxpayer s suit and could brush aside
the lack of locus standi where the issues are of
transcendental importance in keeping with the court s
duty to determine that public offices have not abused

the discretion given to them. (Kilosbayan v. Guingona,

G.R. No. 113375, May 5, 1994)

Q: Through E.O. No. 30, the President created a

trust for the benefit of the Filipino People under
the name and style of the CCP. The trust was to
undertake the construction of a national theater
and music hall to awaken the nation s
consciousness on cultural heritage and to
promote, preserve and enhance the same.
Pursuant thereto, CCP s Board of Trustees received
foreign donations and financial commitments.
Petitioner, however, claims that in issuing E.O. No.
30, there was an encroachment by the President
on the legislative s prerogative to enact laws. The
trial court dismissed the petition on the ground
that Gonzales did not have the personality to
question the issuance of EO No. 30 since the funds
administered by the CCP came from donations,
without a single centavo raised by taxation. Does
the petitioner have the personality to question the
validity of EO No. 30 based on a taxpayer s suit?

A: No, Gonzales did not meet the requisite burden

to warrant the reversal of the trial court s decision.
It was pointed out therein that one valid reason
why such an outcome was unavoidable was that
the funds administered by the Center came from
donations and contributions and not from taxation.
Accordingly, there was the absence of the
pecuniary requisite or monetary interest. The stand
of the lower court finds support in judicial
precedents. This is not to retreat from the liberal
approach followed in the earlier case of Pascual v.

Secretary of Public Works, foreshadowed by People

v. Vera, where the doctrine was exhaustively
discussed. It is only to clarify that the Petitioner,
judged by orthodox legal learning, has not satisfied
an element for a taxpayer s suit. (Gonzales v.
Marcos, G.R. No. L-31685, July 31, 1975)

Concept Of Locus Standi As Applied In Taxation

Q: When may a taxpayer's suit be allowed?

A: A taxpayer's suit may only be allowed when an

act complained of, which may include a legislative
enactment, directly involves the illegal
disbursement of public funds derived from taxation
(Pascual v. Secretary of Public Works, 110 Phil.
331).(1996 Bar Question)

Q: What is the Double Nexus Test ?

A: It is a test utilized in determining whether a party

has standing as a taxpayer promulgated in the US
case of Flast v. Cohen. In order to be a proper party,
a person must:

1. Establish a logical link between his status

(as taxpayer) and the type of legislative
enactment concerned. He must sue on
the basis of an unconstitutional exercise
of congressional power under taxing and
spending clause in the articles of the
Constitution
2. Establish a nexus between his status (as
taxpayer) and the precise nature of the
constitutional infringement which he
alleges.

Doctrine Of Transcendental Importance

Q: What determines the principle of

Transcendental Importance?

A:The following determines the importance of

transcendental importance:
a. The character of the funds or other assets
involved in the case;
b. The presence of a clear case of disregard
of a constitutional or statutory prohibition
by the public respondent agency or
instrumentality of the government;
c. The lack of any other party with a more
direct and specific interest in raising the
questions being raised. (Francisco, Jr. v.
House of Representatives, G.R. No.
160261, Nov. 10, 2003)

Ripeness For Judicial Determination

Q: What is the Doctrine of Ripeness for Review?

A: This doctrine is the similar to that of exhaustion

of administrative remedies except that it applies to
the rule making and to administrative action which
is embodied neither in rules and regulations nor in
adjudication or final order.

Note: It is applicable when the Interest of the plaintiff

is subjected to or imminently threatened with
substantial injury; if the statute is Self-executing; when
a party is immediately confronted with the problem of
complying or violating a statute and there is a risk of
Criminal penalties; or when plaintiff is harmed by the
Vagueness of the statute.

MATRIX OF CTA JURISDICTION

CTA: EXCLUSIVE APPELLATE JURISDICTION TO REVIEW BY APPEAL:

Decisions of the Commissioner on Internal Revenue in cases involving:
a. Disputed assessments;
b. Refunds of internal revenue taxes, fees or other charges and penalties impose
d thereto;
c. Other matters arising under NIRC or other laws (under BIR).
Inaction by the Commissioner of Internal Revenue in cases involving:
a. Disputed assessments;
b. Refunds of internal revenue taxes, fees or other charges and penalties impose
d thereto;
c. Other matters arising under NIRC or other laws (under BIR), where the NIRC pr
ovides a specific period for action, in
which case the inaction shall be deemed a denial.
Decisions, orders or resolutions of the Regional Trial Courtsin local tax cases
originally decided or resolved by them in the
exercise of their original or appellate jurisdiction.
Decisions of the Commissioner of Customs in cases involving:
a.
b.
c.
d.

Liability for customs

Seizure, detention or
Fines, forfeitures or
Other matters arising

duties, fees or other money charges;

release of property affected;
other penalties in relation thereto;
under Customs Law or other laws (under BOC)

Decisions of the Central Board of Assessment Appealsin the exercise of its appel
late jurisdiction over cases involving the
assessment and taxation of real property originally decided by the provincial or
city board of assessment appeals;
Decisions of the Secretary of Finance on custom cases elevated to him automatica
lly for review from decisions of the
Commissioner of Customs which are adverse to the Government under Section 2315 o
f the Tariff and Customs Code;
Decisions of the Secretary of Trade and Industry, in the case of non-agricultura
l product, commodity or article, and the Secretary
of Agriculture in the case of agricultural product, commodity or article, involv
ing dumping and countervailing duties under
Sections 301 and 302, respectively of the Tariff and Customs Code, and safeguard
measures under RA 8800, where either party
may appeal the decision to impose or not to impose said duties.
Decisions of the Secretary of Agriculture in the case of agricultural product, c

ommodity or article, involving dumping and

countervailing duties under Secs. 301 and 302, respectively of the Tariff and Cu
stoms Code, and safeguard measures under RA
8800, where either party may appeal the decision to impose or not to impose said
duties.
CTA: EXCLUSIVE ORIGINAL JURISDICTION:
Criminal Case/s:
Civil Case/s:
1.
a.
b.
c.

Violations of:
NIRC,
Tariff and Customs Code,
Other laws administered by BIR and BOC,

where the principal amount of taxes and fees, exclusive

of charges and penalties claimed is P1M and above.
1. Tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties
where the principal amount of taxes and fees,
exclusive of charges and penalties claimed is P1M and
above.

CTA: EXCLUSIVE APPELLATE JURISDICTION:

Criminal Case/s:
Civil Case/s:
1. Violationsof :
a. NIRC
b. Tariff and Customs Code,
c. Other laws administered by BIR and BOC
originally decided by the regular court where the
principal amount of the taxes is less than P1M or no
special amount claimed.
1. Tax collection cases from judgments, resolutions or
orders of the RTC in tax cases originally decided by
them.

2. Judgments, resolutions or orders of the RTC in tax cases

originally decided by them.
2. Tax collection cases from judgments, resolutions or

orders of the RTC in the exercise of its appellate

jurisdiction over tax cases originally decided by the
MeTC, MTC and MCTC.
3. Judgments, resolutions or orders of the RTC in the exercise
of its appellate jurisdiction over tax cases originally
decided by the MeTC, MTC and MCTC.

Q: What are the importation procedures?

FLOWCHART

MODE OF APPEAL

As to decision or ruling or inaction of the:

1.
2.
3.
4.
5.

Commissioner
Commissioner
Secretary of
Secretary of
Secretary of

of Internal Revenue;
of Customs;
Finance;
Trade and Industry; or
Agriculture

As to decision or ruling of the:

1. Central Board of Assessment
Appeals; and
2. RTC in the exercise of its
appellate jurisdiction.
Appeal shall be made by filing a
PETITON FOR REVIEW under Rule 42
of the Rules of Court with the CTA
within thirty (30) days after the receipt of
such decision or ruling or after the
expiration of the period fixed by law for
action. A Division of the CTA shall hear
the appeal.
Appeal shall be made by filing a
PETITON FOR REVIEW under Rule
43 of the Rules of Court within thirty
(30) days after the receipt of such
decision or ruling or after the
expiration of the period fixed by law
for action with the CTA, which shall
hear the case en banc

A party adversely affected by a ruling,

order or decision of a Division of the CTA
may file a MOTION FOR
RECONSIDERATION or NEW TRIAL
before the same Division of the CTA
within fifteen (15) days from notice
thereof
A party adversely affected by a resolution
of a Division of the CTA on a motion for
reconsideration or new trial, may file A
PETITION FOR REVIEW with the CTA
en banc.

A party adversely affected by a

decision or ruling of the CTA en
banc may file with the Supreme
Court a verified PETITION FOR
REVIEW ON CERTIORARI
pursuant to Rule 45 of the 1997
Rules of Civil Procedure.